"If you can't pay it off in three or four years, you probably can't afford the car to begin with," Marshall says. As a result, he typically recommends taking shorter loans. The same holds true for Marshall's clients, who he says keep their cars for an average of seven years. In the U.S., the average length of new vehicle ownership stands at 79.3 months, or nearly seven years, according to data from research company IHS Markit. "Loans of five or six years are realistic term lengths, but only for those consumers that are committed to keeping their vehicle for that length of time or longer," Drury says. That means that no matter how much money consumers put into a car, they'll likely earn just a fraction of it back if they decide to sell the vehicle and buy a new one.īuyers should also take into account whether they are realistically going to keep their automobile for longer than the length of the loan. After 20 years, your car's value will have dipped by close to 90%, Marshall says. "If you are thinking about purchasing a new car with a loan, you should always remember that, on average, cars drop more than 20% as soon as you drive off the dealership lot," Ryan Marshall, a New Jersey-based certified financial planner, tells CNBC Make It. That's why you should try to put as large a down payment as you can in the beginning."Īdditionally, when buyers funnel money into a new car, they're paying for a depreciating asset. "A 72- or 84-month loan will increase the amount of interest you wind up paying. "Try not to fall into the trap of extending the life of a loan to keep your monthly payments lower," says Mike Quincy, a car-buying expert with Consumer Reports. Plus, longer term loans tend to have higher interest rates, Edmunds reports, which costs you more over the life of the loan, even if the monthly payments are lower. That's because the longer the loan, the more interest you to the lender, in addition to the principal. "For many Americans, the availability of loans with longer terms has created an illusion of affordability," the Journal reports. By the first half of 2019, more than a third of auto loans for new vehicles had terms of longer than six years, according to credit reporting firm Experian. In 2018, the most common term length for an auto loan sat around 72 months, or six years, with 84-month loans at a close second, according to Edmunds. adults have taken out auto loans with longer terms, which means they're often left in debt for years and end up paying more in interest over time. This discrepancy has made it difficult for many Americans to afford cars, the Wall Street Journal reports.Īs a result, many U.S. But in the past few years, automobile prices and interest rates have increased rapidly. In the last 40 years, wages for American workers have hardly risen, according to the Pew Research Center. Think built-in navigation, Bluetooth capabilities, high-tech safety features and more, which "certainly helps to move prices upward," Ivan Drury, a senior manager of industry analysis at Edmunds, tells CNBC Make It. That's because there's a trend toward bigger cars, rather than compact ones, with more advanced features. In September 2014, by comparison, the average APR on a new car was just 4.2%.Īdditionally, shifts in consumer preferences and industry trends have led, in part, to higher average transaction prices. Although interest rates fell to 5.7% as of September, they remain inflated, and the cost of purchasing a new car is "still a lot higher than it was a few years ago." In 2018, interest rates began to increase, and by April 2019, the annual percentage rate (APR) on new vehicles averaged around 6.4% - marking a new record since 2009, according to Edmunds. This increase in automobile prices is due to a number of factors, including rising interest rates and higher average transaction prices, Edmunds reports. That's up from $35,742 in 2018, which was already a 2% increase from 2017, according to Kelley Blue Book. climbed to $36,718, with interest rates hovering around 6%, according to automotive information site Edmunds. In May of 2019, the average price of a new car purchased in the U.S.
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