It is easy to get caught up in the phenomenon of the new car smell. You saw a car that looked great to you, your old car is tired and you are tired of it. You go to a dealership, take that test drive, and the love affair begins. You are blinded by your favorite color, the great stereo, all the safety features, and the fuel economy. You'll do whatever it takes to drive home in your dream car. Does that mean you'll sign a 7-year legal, binding contract so you can afford the payments? If so, you are not alone-but remember that misery loves company.
2021 Q2 Stats
The latest Experian finance report shares the latest financial statistics as of the second quarter of 2021. The average amount financed for a new vehicle in Q2 was $35,163. As far as monthly new car monthly payments, loans averaged $575/month and leases $466/month. The average new vehicle loan term was 69.36 months.
60-Month Loan Cutoff
Going more than 60 months should be approached with extreme caution. Based on your annual mileage, will the car even last 7 years? Are you willing to drive this car for at least 66 months before trading it, because odds are, you'll have to? Did you take the time to calculate how much extra interest you'll pay? You can bet that the longer the loan, the higher the interest rate. What if something catastrophic happens, like loss of job, or health issues and you need to get out of the loan? It is very difficult to get out of a long-term loan unless you had a hefty down payment at the time you purchased.
This is where restraint comes in. If you can't get the car you want in 60 months, you should consider not buying the car. I understand that at the point you find out you can't afford it, you are already in love with it, so planning in advance is critical. There are a ton of car payment calculators online, so figure your budget and find out how much money you can finance on 60 months to get to the payment you can afford, and stick to it.
If you just have to have the car you love, and you don't drive over 15,000 miles a year, look at a 36- or 39-month lease, they are much easier to get out of if you have to. Leasing payments in 2019 Q1 averaged $436/month when taking into account all credit types.
Your Down Payment
Also, if possible, postpone the decision until you can save enough down payment to afford the car on a 5-year contract. Perhaps you can do without some of the options on the car you like, and lastly, maybe there is a two-year-old, low mileage pre-owned car out there that you would be happy with.
If you buy a car today on an 84-month term, it will be almost the year 2026 until you have it paid off. Does that really sound like a good idea? Make a smart car buying decision by using restraint and by using good common sense.