The number of drivers taking out long-term loans to pay for vehicles has increased dramatically in recent years. The number of drivers with long-term auto financing has increased from 14 percent to almost 57 percent in just five years time. The loans are attractive in the modern economy because they offer benefits such as low monthly payments. Auto manufacturers are concerned about this trend because it indicates fewer new car sales in coming years until the loans are repaid. Anyone who is considering a long-term auto loan will want to understand the advantages and disadvantages of this popular financing option.
Lower Monthly Payments
Long-term financing options have the benefit of being more affordable than shorter-term loans. Dividing the price of the vehicle over 60 or 96 months will lower the amount that needs to be paid each month. This can p lace a new car within reach of many families who could not make payments on loans with shorter terms. It also makes it easier to pay for fuel and maintenance until the vehicle is paid off.
Refinancing
One option that some lenders provide for long-term loans is refinancing. Refinancing allows an individual to renegotiate the terms of the loan. This can be used when there are still four or five years left. A new contact could lower monthly payments in exchange for a longer term. Alternately, a driver who has seen an increase in personal income might want to refinance in order to shorten the remaining period so that the loan is paid down more quickly. Not all lenders offer this option since it can increase risk.
Expensive Investment Vehicles
Long-term financing is a practical option for people who are purchasing a vehicle that is very expensive and very rare. This could be a brand new unique car with the latest technology and options. It could also be a classic vehicle with original parts and paint. These types of vehicles have an intrinsic value that does not decrease by a significant amount over time. Some classic vehicles are actually investments that will increase in value. A long-term loan has almost no disadvantages in these cases.
Interest
The largest disadvantage of long-term loans is the amount of interest that will need to be paid. The increased term of the loan could cause a borrower to pay anywhere from two to five times the traditional amount of interest. This can significantly increase the actual price of the vehicle. An important point to be aware of is if the loan has variable interest rates. These rates will change with the markets. A very long loan could see many interest changes over the course of several years that might increase monthly payments for short periods of time.
Depreciation
Depreciation is a problem for loans over four or five years in length. The value of the vehicle will start to drop every year after the initial purchase. The value of the car will eventually drop below the remaining amount that is owed on the loan. This causes negative equity. Negative equity means the car is actually worth a negative amount. This could cause financial problems with insurance if an accident occurs. It can also be psychologically difficult to deal with during the last few years of the loan.
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