It may not be what you want to hear, but if the payments are making you wince, there’s a good chance you’re shopping above your budget. A buyer will only pay you what the car is worth, not what you still owe on it, so you’ll be stuck paying the balance of the loan. Having negative equity can limit your options if you’re in a money bind or if you get tired of your car before it’s paid off. With a 48-month loan, you’ll break even at about 25 months, while that would take you 40 months on an 84-month loan. The time it takes you to build equity in the car will vary based on the vehicle’s resale value, the loan term and down payment. Many auto loans start in a position of negative equity, meaning you owe more on the loan than the vehicle is worth due to finance charges and the initial depreciation hit of about 20%-25%. You’d be paying $9,403 in finance charges. However, interest rates are much higher for used cars, and a rate of 9.2% is fairly common. It seems somewhat reasonable from a monthly payment perspective. Now let’s say you purchased a lightly used car with a 72-month loan term at the average financed price of $30,830. That’s $6,445 more over the 48-month loan and yet 34% of new-car buyers are willing, or forced, to make that compromise. It seems like a massive improvement over 48 months - until you see the finance charges: $7,990 over the life of the loan. The monthly payment would drop to $563 with a 5.4% interest rate. It’s easy to see why someone would opt for a longer loan.Ĭontrast that with an 84-month auto loan. The finance charges over the life of the loan would be $1,545, giving you a staggering monthly payment of $852. If we went with the recommended 48-month term, it would have an average interest rate of 1.9% in March 2022. The average loan amount for a new car in the first quarter of 2022 was $39,340. Let’s take a look at how the numbers change on two loans that are on opposite ends of the financial spectrum. The longer the term, the more interest you will pay on the loan, both in terms of the rate itself and the finance charges over time. Just over 80% of used car loan terms were over 60 months, with 72 months the most common term.Ī longer loan has the carrot on the stick of a more palatable monthly payment, but it comes with a number of drawbacks. The most common term was 72 months, followed closely by an 84-month loan. In March, 73.4% of financed loans were above 60 months. “Shoppers who can actually get their hands on a vehicle are committing to never-before-seen average payments and loan terms.” “Shrunken inventory continues to wreak havoc on both the new and used vehicle markets,” said Jessica Caldwell, Edmunds’ executive director of insights. At today’s car prices, the old rule of thumb is not only being ignored but is also unattainable for most Americans. The longer loan terms reflect not only a trend of people seeking a way to offset paying for costlier trucks and SUVs but also inflated prices due to a nationwide vehicle shortage. The average loan term for a new or used car has steadily increased over the last decade and is now about 70 months.
But the reality is only 6% of new car shoppers actually followed that advice in March, according to Edmunds sales data. The traditional “20/4/10 rule” of car buying states that you should make a 20% down payment, have a loan no longer than four years, and a total monthly car budget that does not exceed 10% of your take-home pay.
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