Average Car Loan Durations

By John Hayden

The average car loan duration helps determine whether or not the loan is worth taking, alongside other factors. Hence, the question of what the average length of a car loan is.

Car loans come in various forms to fit the specific financial situation of the individuals. This implies that the parameters of the loan will vary from person to person and ultimately vary the length of the loan considerably. Thus, any average that may be calculated will not likely help your decision-making process. This is because they may be far from what you’ll eventually get in a deal.

The state of car loans are periodically analyzed and statistics released to the public yearly. This is so that a workable average may be extrapolated from such data. The trend shows that car buyers are getting longer car loans some as long as 84 months. This affords the car owners lower payments per installment and a significant increase in the number of cars sold.

Longer Car Loan Durations 

In recent times, car buyers have been looking to have loan offers with lower interest rates. And longer terms to make their monthly payments as small as possible. This is, obviously, more convenient for car buyers since they can still have some funds for other monthly expenditures.

Do you wonder whether such long term loans are of any benefit to the lenders? The loan is spread over a more extended period, and each repayment is much lower in value. But the interest is now paid for a more extended period! This means more interests can be collected on long terms loans than is possible on short term loans at the same interest rate. So the borrower gets the advantage of convenience while the lender receives the advantage of collecting more interests. Both parties are happy.

Expensive cars

One other reason why there are car loans with longer terms is the propensity of car buyers to procure the more expensive cars. This is a global trend. More countries, the world over, now have more people with incomes that make them financially capable of acquiring more costly vehicles.

People who also want to have such prestige of driving more expensive cars but need car loans to achieve it have two choices. One is to maintain the term of the car loan and take care of the higher price by increasing the monthly payment. The other is to extend the term of the loan without increasing the monthly payment. Many will likely opt for the latter scheme because of its convenience. The average length of car loans increases by the buyers’ tendency to buy more expensive cars.

Average Car Loan Duration: Downsides

Longer-term car loans will be considered a terrific deal until it is realized that the only ‘good’ thing about it is a convenience that comes with it. Many financial decisions have benefits in one area and losses in other areas, and the decision to go for long term car loans is not different. One obvious downside here is that, as mentioned before, the buyer ends up paying more interests than he would have paid in a traditional, short term car loan. This is the encouragement for the lenders to give out the loan, though.

For further clarity, interest paid on car loans is not part of the actual payment for the sticker price of the car. It only functions to offset the risk of the lender and becomes his profit. Hence, the more interest paid (or, the longer it takes to pay the interests); the more ‘unnecessary’ expenses are incurred by the car buyer. They are termed unnecessary because they are not part of the cost of the car; and a considerable part of it is avoidable with shorter loan terms. The total interest paid in these long term car loans can be as much as the original cost of the car or even more, in some extreme cases.

Underwater deals

There is yet another situation that may come up and make a car buyer incur more losses from a long term car loan. Although we are not here to peddle fear, we would be doing you a great disservice if we fail to present this information to you in these age of increasing car loan terms.

Have you heard of underwater deals? It is what happens when the car owner goes to trade it in at the end of the long term car loan. The car owner realizes that the car has drastically depreciated. Even though vehicles begin to depreciate from the moment they are driven away from the sales point; the loss in value/money we are talking about in underwater deal (or underwater trade-in) is enormous.

Debt-To-Asset Ratios

Beyond the loss of money, long term car loans via underwater deals, have the further detrimental effect of negatively affecting the debt-to-asset ratio of the car owner. They calculate the debt-to-asset rate by dividing your total debt by your total assets and multiply the figure 100 to get a percentage.

A suboptimal debt-to-asset ratio may look like just a figure until you see how much it can mar your financial narrative. To understand this phenomenon better, let’s know what credit scores are and how to go about calculating credit scores.

When lenders see your credit score, they can predict your likelihood to pay back the loan entirely and promptly. Your credit score will, therefore, go a long way in determining the kind of deal you will get from the lenders of car loans. They can confidently approve your car loan when you have a high credit score. So how does debt-to-asset ratio come into the picture of credit scores? After your personal credit history (which, of course, is a logical way to predict your future finances); one of the most heavily-weighted variables is the debt-to-asset ratio. A large debt-to-asset ratio means you have a lot more debt than assets; and that may further imply that you have incurred more debts than you can afford to pay back. So the more significant the value of the ratio, the lower your overall credit score.

An overly long car loan puts you at risk of the underwater trade-in. If you happen to find yourself in such a situation, your debt-to-asset ratio automatically increases. A high debt-to-asset ratio will, in turn, sink your credit score. That can make it more difficult for you to get loans in the future, whether to buy vehicles or property.

Overview of Average Car Loan Durations

In conclusion, more people are opting for longer car loan durations because they offer lower monthly installments. So the average length of car loans is, obviously, on the upward swoop. And we have seen that it is pointless to give a figure for the average length of car loans here; since there will be a lot more to consider beyond the statistics you’ll be getting in the mail every month. Each person’s situation is peculiar, but there is no recommendation for very long-term car loans.

If you find it difficult to calculate the average length of your car loan, we are here to help. With over 200 satisfied clients, our experts will break this down completely for you. They will also look into the kind of deal that won’t hurt your finances. To use their help, meet with them now.

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