Say No to a 72 Month Car Loan
By: Kevin Dombrowski
As of 5/31/18
Past performance is not an indication, prediction or guarantee of future results.
Markets were variable this week with very little net movement overall. On Wednesday, the Federal Reserve raised interest rates and signaled that two additional increases were on the way this year, sending stocks down slightly. Wednesday’s rate increase was the second this year and the seventh since the recession nearly ten years ago. These increases will likely translate into higher borrowing costs for cars, mortgages, and credit card interest rates over the new few years.

The stock market showed little reaction to the summit between President Trump and North Korean leader Kim Jong Un on Tuesday, but investors traded sharply on a federal judge’s approval for AT&T’s planned acquisition of Time Warner Inc. that same day. The next day, Comcast made an unsolicited offer to buy a majority of 21 st Century Fox, kicking off a bidding war with Disney. 

So, what’s happening? Last year Fox’s board rejected an earlier Comcast bid in favor of a deal with Disney, fearing regulators would likely block a deal with Comcast. However, with the recent federal judge’s ruling regarding AT&T and Time Warner, a new path may have been created that makes a deal with Comcast possible. Why is this happening? Media, cable, and telecom companies are scrambling to grow in order to compete on a larger scale, especially as new players like Facebook and Netflix have disrupted the industry. The battle for Fox pits some of media’s most powerful individuals – Comcast’s Brian Roberts and Disney’s CEO Robert Iger – against each other. This should get interesting.

Say No to a 72 Month Car Loan
Americans have become addicted to minimizing monthly payments – but are not necessarily spending less. Many companies feast on this addiction, and find ways to craft the purchasing experience to fit a monthly payment model. Consider Apple’s iPhone which was priced around $200-$400 from 2008 thru the end of 2013 . As the price of the phone continues to rise, so too do the options for consumers to utilize a payment plan – making the phone more accessible, even to those who probably don’t need it or can’t afford it outright. In the end, the consumer is happy because he or she gets something right away for little immediate cost. The company is happy because it creates an increase in revenue, even before interest; a classic lending model.

We are seeing this happen more often in the automobile space. In fact, the average US auto loan length is at an all-time high, hovering around 69 months . This is not just for new cars. 41.3% of used car shoppers are taking 61 to 72 month loans, while 16.2% go even longer , financing between 73 and 84 months. Coincidentally, as Americans continue to finance their auto purchases with longer loans, we see the price of automobiles increasing at comparable rates .

Auto loans above 60 months are usually not the best way to finance a car. Why? First, the longer your term, the more “underwater” you likely are related to the loan versus the current market value of your vehicle. Second, these extended loans set you up to remain in debt for a longer period of time. If you don’t keep that auto for at least the duration of the loan, you may end up owing on that car when you are ready to purchase a new one - creating an ill-advised cycle that may further stretch you financially. Third, consumers pay higher interest rates when they stretch loan lengths over 60 months, making the car even more expensive. 

Instead, consider committing to shorter loan length with higher monthly payments or simply selecting a less expensive vehicle that fits your timeline and monthly payment criteria. In the end, you will thank yourself as it will be less money out of your pocket overall and will set you up to be debt free sooner.
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