Important Financial Information CV WorldWide offers some information on automobile loan terms... How long should my car loan be? When it comes to buying a car, most people have an idea of what monthly payments will fit their budget, and that's what they target when they're making a deal. But this monthly payment mentality is making car buyers lose track of the bigger picture: the total cost of the car and the length of time it will take to pay it off. Edmunds data tells the story: For the past decade, the average car loan term has slowly crept past five years, and is now close to five-and-a-half years. Thirty-eight percent of the auto loans in 2012 had terms of five-and-a-half years to six years. And 12 percent of the loans were for terms of six to seven years. "Consumers are battling two things," says the director of automotive credit at Experian. They are trying to get a good interest rate and a reasonable monthly payment. But sometimes the five-year loan has a monthly payment that is too high for them, and they end up financing for a longer term, even if it costs them more down the line. Is there any benefit to having a seven-year car loan? Aside from having a lower monthly payment, no. In fact, there are many reasons why you shouldn't choose such a long car loan term. Higher Interest Costs The longer you finance a car, the more interest you will have to pay on it. Edmunds recommends a five-year loan, less if you can manage it. Here's how the numbers look when you compare a five-year loan to a seven-year loan. We chose a 2013 Honda Accord Sedan EX-L V6 with navigation for our example. Its True Market Value (TMV速) is roughly the same as the average price of a new car in 2012. Edmunds data shows that the average down payment in 2012 was $3,435. We entered those numbers in our loan calculators. After tax, title and the down payment, the total amount to be financed is $30,266. The average interest rate for a four-and-a-half to five-year loan in 2012 was 2.69 percent, according to Edmunds data. That person would have a monthly
payment of $540. The finance charges over the life of the loan would be $2,115. Contrast that with a seven-year loan. The interest rate would be higher, according to Edmunds data: 4.9 percent for loans of six to seven years in 2012. It's common for longer loan terms to carry slightly higher interest rates. The monthly payment for a seven-year loan, $426, would be lower than for the five-year loan. But the finance charges for the loan would be $5,548. That's more than twice that of a five-year loan. It is easy to see how someone could be lured by the appeal of the lower monthly payment afforded by the longer loan. A buyer would "save" $114 per month in car payments, but in the long run he would pay $3,433 more in interest than if he'd chosen the five-year loan. Plus, he'll have two more years of car payments. Negative Equity A new car typically depreciates about 22 percent in its first year. At the beginning of a car loan, the buyer is typically "upside down," or "under water," meaning he owes more than the car is worth. The situation is made worse if the buyer hasn't made a large enough down payment. Based on Edmunds data, most people aren't making a big enough down