When we go to buy a new vehicle, we always try to get the best deal we can possibly get. We go from lot to lot. We check a thousand websites. We even negotiate with the car salesmen like we’re in a James Bond movie. So after all that effort to make ourselves feel like we’ve saved a bunch of money, what’s one final way the car dealerships can “get you”? How about financing it with a 72 month auto loan and paying a lot more for it than we should!
Among the myriad of things that could possibly go wrong when you go to buy a new or used automobile, one of the big things you’ll have to watch out for is what kind of auto loan you take out to finance it. If you’re foolish with your finances and don’t realize what you’re really signing up for, then you’ll be on the hook for paying a lot more money than you should even after the auto has practically lost most of its value.
Why Do They Even Make a 72 Month Auto Loan?
In the beginning, auto loans were sensible. When a man or woman needed a car but didn’t have a couple thousand dollars to throw down on it, they would take out a loan for 36 or 48 months. Coupled with a modest down payment this type of loan made sense and life was good.
But then as time went on, people became greedy. 48 month loans got extended into 60 month loans and 72 month loans. Hell, I even saw an advertisement for an 84 month auto loan. The rationale behind offering these types of loans was simple.
Let’s say you want to buy a car (new or used) for $30,000.
1) Auto dealers could make their prices “seem” lower than they really were. Which would you rather pay: $483 or $691 per month? Yeah, that’s what I thought. The natural human reaction is to take the lower price. Advertisers aren’t stupid, and that’s exactly why they do this. (By the way: the prices quoted above are for a 72 month loan vs a 48 month loan at 5%).
2) Banks make more money. So even though you’d be paying less money but over a longer time period, you’d eventually pay a lot more for your vehicle in interest than you think. In the example above for a $30K loan you’d end up paying a grand total of $33,162 vs $34,787. That’s a difference of $1,625 just for stretching out the payments to a 72 month term. Whoa! Is that really worth it?
The Biggest Factor – Auto Depreciation:
What really makes a 72 month auto loan (or basically any auto loan after about 4 or 5 years) stink is the fact that your car depreciates – AND FAST!
There is a sweet infographic on Edmunds about how cars lose their value. Here are a few highlights of how quickly your automobile depreciates from the total market value:
- Within 1 minute of your purchase = 9%
- 1 year = Another 19%
- 2 years = Another 12%. Now your car is worth 60% of what you paid for it.
- 3 years = Another 9%
- 4 years = Another 9%
- 5 years = Another 9%. Now basically your car is worth 40% of what you paid for it. Pathetic. And with any luck your car still hopefully works….
So if we take our example from above where we’re trying to get a $30K auto loan for either 48 months (green) or 72 months (purple), here is what that would look like over time relative to the actual car value (red).
Notice how after 2 years with the 48 month loan, the amount of money you owe becomes less than what the car is actually worth. That is good because if you decide to sell it or something happens, you won’t be “upside down” on your loan (meaning you owe the bank more than the car or asset is worth).
Now compare that to the 72 month auto loan. Somewhere around year 4 the auto value finally becomes worth more than what you still owe for it. But that is risky. What if you get in an accident? What if the car stops working? What if decide you’d rather have something more economical or more fuel efficient? That’s a long time to wait until you’re no longer upside down on your payments.
The morale is whenever someone offers you a lower price to finance something, be wary of what is really going on. Make sure you’re really getting a good deal and not just tricked into something you’ll be stuck with. A little bit of math can go a long ways to making sure that your car buying experience isn’t any harder than it needs to be.
Images courtesy of FreeDigitalPhotos.net, Mr FD