7-year car loan hits Americans in their wallets: NPR

Laura Hart states that if she had received a five-year loan instead of a seven-year loan, she would not have let the dealer talk to her about buying an extended warranty, and perhaps she would have bought a less expensive car.

Courtesy of Laura Hart

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With permission from Laura Hart

Laura Hart states that if she had been given a five-year loan instead of a seven-year loan, she would not have let the dealer talk to her about buying an extended warranty, and perhaps she would have bought a less expensive car.

Courtesy of Laura Hart

A couple of years ago, Laura Hart had been through a divorce, her car was 11 years old, and she wanted a new vehicle. "Almost," I earned it, "really" is how Hart says she felt at the time.

She had been through a tough experience "while maintaining a full-time job and raising two kids and stuff, so when I got to the point where I felt comfortable taking out a car loan again, I was pretty proud and ready to Do it. "

Hart is a school principal in Clovis, California, and had children; she wanted better security features. She decided on a new Jeep Cherokee.

She spent almost exactly what Americans spend on new cars on average these days – $ 37,772, according to car salesman Edmunds. Americans buy bigger, more expensive cars with more options. And one thing driving this trend is dealers who offer car loans with a seven-year term.

A seven-year car loan means lower monthly payments than a three- or five-year loan. It sounded good to Hart. And she's not alone. One-third of all new car loans now have terms longer than six years, according to credit reporting company Experian. This is more than three times the share of the loan market than a decade ago.

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But although these loans are popular, they are probably not the best feature of personal finance.

"Long loan terms are a really dangerous trend," said Philip Reed, auto editor for personal finance site NerdWallet. He has written books on car purchases and worked undercover at a dealership for several months to learn more about the car buying process when he worked at Edmunds.

"When most people buy a car, what they see on the monthly payment is inherently a big mistake," Reed says. He says car dealers know that if they can make the payment look reasonable, people will think it's a good deal.

"But it doesn't really work that way," Reed says. For one thing, with seven-year or sometimes even eight-year loans, "you will pay a huge amount in interest," he says.

Loans for long-term loans usually have higher interest rates – and you pay longer, he says. So Hart's Cherokee is likely to cost her upwards of $ 2,000 more in interest than a five-year loan would have.

And if you want to sell your existing car – maybe you have another child and need a minibus – with a seven-year loan it's much more likely that you're stuck still owing a lot more than the car is worth, Reed says. "It puts you in a very vulnerable financial situation," he says.

For new car purchases with a run-in, about a third of people now debts an average of $ 5,000 from their old car loan to their new car loan, according to the Edmunds website. In other words, they still pay for a car they no longer own.

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Some economists say that many Americans extend much more than they need to do. Cars, like most other things, are getting more expensive over time. But inflation is only part of the story. If you compare a car from a decade ago with a similar car today, the prices of similar vehicles have not risen nearly as much as the prices of cars that decides to buy.

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In other words, "people have significantly upgraded the vehicles they buy," says economist Donald Grimes of the University of Michigan, who studies the automotive industry. He says Americans are deciding to buy bigger, cheaper cars with more options.

"They are now much more likely to buy an SUV, pickup or crossover SUV, and much less likely to buy a small sedan," says Grimes.

Grimes says rolling out old car loans to new car loans suggests that many can't afford the vehicles they buy. And he says the prices they pay rise faster than wages.

Adjusted for inflation, "spending on new dollars and trucks on real dollars has risen by $ 5,299 over the last 10 years," says Grimes, "while annual salaries have risen by $ 3,646."

So, says Grimes, seven-year car loans seem to be encouraging many Americans to spend too much. These long-term loans also help dealers pack more expensive accessories.

John Van Alst, a lawyer at the National Consumer Law Center, states that when you buy a car, "you've probably already spent hours when the dealer chose your car – maybe negotiated with the seller about the price of the car yourself – and you They will often refer to it as the box. "

That's when the car dealers tell you the loan options and try to sell additional products: extended warranties, gap insurance, tire protection plans and paint protection plans. Dealers make a lot of money on these. Van Alst says these are often dramatically overpriced and that most car buyers don't know what a reasonable price is.

"Is this supplement, you know, marked with 300%? You really don't know any of it," says Van Alst. And with a seven-year loan, he says there is more room to throw in these additional products without pushing up the monthly payment as much.

The National Automobile Dealers Association had no comments.

When Hart bought her Jeep, she agreed to buy an extended warranty and other additions, leaving $ 2,700 on the loan.

Hart likes her car, and in her case she did not exaggerate dramatically. But she has some regrets on the buyer since she wants to pay in for so long. And now she says that if she had not received the seven-year loan, she would certainly not have agreed to the expensive additions.

When it comes to the car itself, she wonders, "If the loan had to be five years, what car would I actually have driven by the party that day?"

The odds are, somewhat cheaper.