Imagine the car of your dreams on the car dealer’s showroom floor when a salesman comes up to you and says, “I can get you into that car and have you drive it away for just $320 a month!” The offer sounds fantastic, the monthly payment is manageable, and you can have the car today! What’s not to like about this? Evidently many Americans agree with this philosophy of cheap monthly payments to the tune of 40% of all new car loans financed in the second half of this year.
But if you have ever heard the saying that “there is no free lunch” this is especially true for car loans with low monthly payments. Although you may pay less from month-to-month, you also have to consider that you’ll be paying off your loan on an extended payment schedule in exchange for the low payment plan.
As an example, if you bought a mobile phone for only $10 a month, this initially sounds like a good deal. But if you found out that the payments last 7 years, that $600 phone would have cost you $840 at the end. (No phone company does this...so far.) So even if a car dealership spends hours with you in trying to get you a suitable loan, the low payments aren’t what you should be focusing on as much as how long the loan schedule is and what sort of interest you’ll pay on the life of the loan.
Time Is Not On Your Side
In general the longer the car payments stretch out, the more money you’ll be paying above and beyond the principle amount you signed up for. But in spite of this fact, sub- $500 monthly payments are the fastest growing segment for car loans, with six and seven-year loans being the most common. While a long loan payment is easier on the wallet initially, it will hurt you financially in the long run.
If a lengthy car loan isn’t good for people, then why is this becoming so popular? The major reason seems to be how cars are advertised by car dealerships and carmakers. If you scan any newspaper or Internet car ads they’ll always tout low monthly payments as an easy way to pay for a car. This message has become so prevalent that consumers accept these types of loan programs without giving it a second thought.
Give It A Second Thought
If you are tempted to get into a low monthly car loan payment schedule it may be a good idea to avoid it if you possibly can. Car shoppers think that they’ll have extra money to spend if it isn’t tied up with a higher payment, but the reality is that in the long run, it won’t save them a penny but will cost them more.
If you are in good financial condition and can afford to pay off the car in less than 6-years time, definitely do so to save yourself some of the interest payments. This could add up to thousands of dollars over the life of the loan, so even if low monthly payments sound like a good idea, give it a second thought before you dive in.
Source: CNBC
Image Credit: Brian Robert Marshall / WikiCommons