Why Dealers Prefer You Get Longer Loan Terms
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|
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 ShoppersTrueCar No-Haggle, CarsDirect, and NADAGuides 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
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid