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Why Dealers Prefer You Get Longer Loan Terms

Dealers know most car shoppers are payment buyers, those that focus only on the monthly payment and whether it's affordable.

This is the worst thing you can do as a car buyer - it's like having a big neon sign over your head flashing "SUCKER!".

If you're only focused on the monthly payment, it's easy for the dealer to play around with the term of the loan and interest rate to get you the monthly payment you want.

The problem with this is you'll end up paying a lot more than if you had negotiated the price of everything by itself, rather than the monthly payment.

Dealers prefer you get a longer loan term, usually 48 months or more, because in addition to lowering your monthly payment, it allows them to stuff a bunch of other products you may not need or want into the loan - called payment packing - and they know you won't raise an eyebrow as long as the monthly payment is within range.

Dealers will also make more money arranging your loan if you get a longer loan term. The "finance reserve" is a commission they get for arranging your loan - usually 1% to 3% interest added to your loan.

Ideally, you want to keep your auto loan term as short as possible - 36 or 48 months should be your maximum. Otherwise, you'll be paying a lot of interest cost over the life of your loan.

Let's take a look at an example:

For a $25,000 Car Loan:

Loan Term Interest Rate Interest Cost
24 months 7% $1,885
36 months 7% $2,825
48 months 7% $3,780
60 months 7% $4,760
72 months 7% $5,680
84 months 7% $6,775

As you can see, the difference in interest cost between a 2 year loan and a 7 year loan is nearly $5,000! That's the amount you will pay in order to extend your loan for an additional 5 years - is it really worth it?

Makes more sense to try to save for a bigger down payment and wait a few months.

Most people don't realize the amount of interest they are paying when they extend their loans out this far. As a good rule of thumb, always try to have a down payment of at least 20% and keep your loan term down to 48 months or less.

My Recommendation for Car Shoppers

TrueCar No-Haggle and Edmunds Price Promise are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan

Gregg Fidan

About: Gregg Fidan

Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.

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