Are Extended Car Loans the New Normal?

By

Senior Pricing Analyst

Alex Bernstein is the Senior Pricing Analyst for CarsDirect.com. Each month he studies immense volumes of pricing and incentives data in search of trends that are useful to car shoppers. In the process, he often breaks industry news stories -- his analyses and insights have been featured on websites such as Automotive News, The Detroit News, Autoblog, The Truth About Cars and The Car Connection.

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, Senior Pricing Analyst - January 30, 2015

With new car transaction prices reaching record levels, extended car loans have become an appealing option for some shoppers. Most automakers have embraced them, but some haven't. Here's what you need to know.

Longer loans


Extended car loans were big in 2014. According to Experian, there was a 40% jump in the number of loans between 61-72 months in the period from October to November. Loans 73-84 months rose 25%. That's right. People are taking out 7 year loans.

More features, higher prices

Why are loan terms increasing? Low finance rates are one factor but so are car prices. Analysts at Kelley Blue Book say that the average transaction price for a new car in December was $32,804. Cars are being built with more expensive features like rear-view cameras and blind spot warning and shoppers are using longer loans to keep payments under control.

Payment-driven mindset


Many shoppers think in terms of monthly payments. But there could be a good reason for this- a recent Pew study found 55% of households essentially live paycheck to paycheck.

Not seeing the appeal of a long loan? Consider that personal finance gurus often say that if you can’t pay off a car within 3 years, you can’t afford it. But where does that really leave someone?

A shopper looking at a 2015 Chrysler Town & Country LX is confronted with a 36-month payment of $761, assuming a 10% down payment, $500 rebate, and 0% rate. However, with an 84-month term at 1.9% and a $500 bonus, that payment drops to $349. For some, that's a much easier pill to swallow.

Abundant offers

The number of automakers with extended loans is staggering. In January, CarsDirect analysts found that over 23 automakers had promotional loan offers over 72 months in length. Rates ranged from 0% (Volvo) to 3.9% (Cadillac) for shoppers with top-tier credit. The average rate in this range was 2.2%.

Some automakers aren't playing ball

Honda stuck out as an oddity in our comparison, with loans capped at 60 months. This is no accident- in an interview with Bloomberg, Honda's U.S. sales chief vowed to avoid longer loans, calling them "stupid."

Why "stupid"? Consider the possibility that a car loses value faster than you can repay the loan. In Honda's view, this is potentially bad for both consumers and the auto industry. This doesn't seem to be stopping other automakers from diving in, however.

Weigh your options carefully

Now is undeniably an excellent time for extended car loans. With cars becoming so expensive, families are looking for ways to keep payments manageable. An array of choices makes it especially important for shoppers to carefully weigh their unique circumstances before making a decision.

It's not easy to keep track of offers from various automakers. That's why our analysts write buying insights each month on over 300 vehicles. Visit the CarsDirect Pricing Insider page, and sign up for email alerts to receive the most recent analyses as soon as the incentives change.

>> See the best extended car loan deals of January 2015

>> Read insider buying advice for over 300 different models

>> Don't have perfect credit? Learn about your alternatives.

, Senior Pricing Analyst

Alex Bernstein is the Senior Pricing Analyst for CarsDirect.com. Each month he studies immense volumes of pricing and incentives data in search of trends that are useful to car shoppers. In the process, he often breaks industry news stories -- his analyses and insights have been featured on websites such as Automotive News, The Detroit News, Autoblog, The Truth About Cars and The Car Connection.

Follow On: Google+ | Website