The average new car loan was $26,691 at the end of 2012. With a major monthly expense at stake, buyers who intend to finance a new car purchase should generally shop carefully for the best price and terms they can find.
In the fourth quarter of 2012, the average length of a new car loan increased to 65 months, a new record. A larger percentage of car buyers are taking out loans with repayment periods that last for six to seven years, which might help them qualify to buy a pricier car but also increases the effective cost over time.
For example, a borrower with a five-year, $25,000 car loan with a 4.5% APR would have monthly payments of $466 and pay $2,960 in total interest. A seven-year loan at the same rate would have lower monthly payments of $348, but the borrower would pay $1,272 in additional interest over the life of the loan.
About 20% of all car transactions are leases, which means the consumer pays to use the car for a set number of months before returning it to the dealer. Leaseholders who surpass a preset mile allotment typically must pay a penalty for every extra mile driven.
Car manufacturers sometimes offer “subsidized” leases that can make them a better deal than a purchase. As with a sale, a buyer can haggle with the dealer over the capitalized cost (or vehicle price). The money factor (which represents the interest rate) and the residual value (what the car or truck is worth at the end of the lease) may also be negotiated with the lender.
Sources: Kiplinger.com, October 31, 2012; CNBC.com, March 5, 2013; usnews.com, September 14, 2012
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