Americans Are Taking Out Ridiculously Long Auto Loans

[Anonymous]

I'm one of "those people" who took out a 72-month loan on a vehicle.  I'm not saying I am right in my thinking or opinion, but this was my logic and plan.  I drove out of the dealership 2 years ago with a 50k vehicle with $0 down and 72 monthly payments. 

I didn't plan on taking 72 months to pay it off, I wanted the lowest possible payment in case my financial situation changed in the future.

I had the money for the down payment, but I didn't offer it at the purchase.  I waited several months until the vehicle showed up on my credit reports and them paid down the loan by 5K showing as a 10% reduction in the loan.  This alone gave my credit score a bump.

2 years later the vehicle is 50% paid off through an accelerated payment plan.  I have the base payment on auto-pay, and when my finances warrant, I pay extra on the principal.  I've been told from some advisors that because I've paid it down to 50% and the loan is over 2 years old, it isn't as relevant in my credit scoring any more.  It was suggested to refinance the vehicle or purchase another vehicle.  I'm not inclined to do that yet, and probably won't do either.

This worked for me, and it worked for my financial situation, but it may not work for you.  I just thought I would share where a 72 month payment plan could be a sound financial and credit score strategy.

[OmarR]

If your income supports it, than go for it. But if your income doesn't, than stretching it to 6 or 7 years to get the payment down is never a good plan.

[Revelate]

Well unlike some advisors clearly I know how installment loan scoring works and also not too shabby on finances.

Buying a car is a consumer need/want and not a credit one.

Refinancing a car is a financial decision and yet another credit penalty.

That all said accelerated payment plans help negate the additional interest on the longer amortization time horizon with a longer-term loan.

I am also a big fan of taking out as long a loan as possible and then just making lump sum payments to it likewise for the same reason as Omar: my earnings have been inconsistent over time. Anyway, I paid off half my auto note in a year (it was admittedly a good year) and depending how this year goes I may just pay off most of the rest of it frankly though I will leave it open for the next several years just because potential scoring goodness even if my mortgage appears to dominate that part of the calculation.

I can see the problem: people that make minimum payments on their credit cards are going to make minimum payments on their loans too though it’s more tolerated there... and at least given the average consumer stories out there good chance the longer loan was just to shoehorn in the new car into an already squeezed paycheck.

Of course when you can get a loan for call it 6% or under, historically speaking let that ride and keep shuffling money into the market figuring average returns will beat that (inflation might hurt market returns but it does make your loan similarly cheaper over time so that washes out of the math). Admittedly I thought 3.85% guaranteed return was the best decision I could make at parts of last year: I was mistaken but ah well, happens regularly hah. Probably cost me 4K in “on paper money” but that wasn’t the worst financial decision I made last year either.

End of the day if consumers were better about money it wouldn’t be a problem.