Last year was a record for automakers. Nearly 17.5 million new cars were sold in America last year, surpassing the previous high set all the way back in 2000.
While plenty of people see that as a solid sign that the U.S. economy is doing well, I am worried by how all those purchases are being financed.
The average term for a new car loan was 67 months. That’s more than 5.5 years. Even more troubling is the fact that in the third quarter of 2015 more than 27% of new car loans had a length between 73-84 months, according to Experian Automotive.
People, those long loan terms are extremely stupid. Yes, I said stupid. Listen to me (and not the fast talking person at the auto dealership): any loan term over three years is a signal you are being snookered.
Let’s talk facts:
Don’t start with the “Oh, Suze” moans that I don’t get it. I am fine with you buying a car. But let’s be honest. All you need is a car that is reliable and that is affordable. My definition of affordable:
If you can’t pay 100% cash, choose a car that you can pay off with a loan that lasts no longer than 36 months.
Anything longer is a signal you are buying a car that is too expensive for your financial health. Just keep reducing your target purchase price for a car until it settles into a zone where you can handle the payments on a 36-month loan.
Then in month 37 you will be so happy you followed my advice. Why? Because you will now have a completely paid off car. Whatever you were paying on the loan--$150 a month, $300 a month, $400 a month-is now money you can use for other important financial goals.
Let’s say your payment is $300 a month. If you have a 67-month loan rather than a 36-month loan that’s an extra 31 payments you will make, totaling an extra $9,300. Can you honestly tell me you don’t have a more important use for that $9,300? Invest that $300 for 31 months in a Roth IRA that grows at an annualized 6 percent and you will have more than $10,000 at the end of the 31 months. Even if you never add another penny to that pot, but let it keep growing, in 25 years it could be worth more than $43,000.
I bet if you added $43,000+ to the cost of a car you are going to finance with a long loan you would be appalled at what you were about to do.
In 2016, if you are going to buy a car, drive the best deal by choosing a loan no longer than 36 months.