The real cost of extended-length car loans

There is a new car loan trend toward something called an extended-length loan. But, careful. This can be a real financial pitfall.

I remember when car loans creeped up to five years and people shook their heads and said, “That’s a really bad idea.” Well, now we are seeing 84-month loans. That is seven years. Yes, paying off a car loan for seven years.

This is how it'll be pitched to you: You can get a lot more car because you'll have lower payments. 

And more folks are buying it. Consumer Reports, the consumer watchdog group, says that last year there was a 29 percent increase in extended length loans - again 84 months. 

This is real tricky territory folks. Take a look at the math here. 

Four-year loan: Let's say you get a new car for $25,000 at 1.73 percent interest rate. You'll pay $900 in interest over the four-year term. 

Seven-year loan: Let's look at the same car, but bump up the loan length, which will also increase your interest rate to 2.38 percent.  You'll now pay $2,180 in interest on this longer-term loan. 

           Big Interest on Big Loans

  • 4 years @ 1.73% = $900
  • 7 years @ 2.38% = $2,180 

But it gets worse. I talked with the VP of consumer lending at Delta Community Credit Union who says the second you drive that new car off of the lot it depreciates as much as 11 percent. Now add the cost of a seven-year loan. If something happens to the car before you pay it off, you can be in a heap of trouble. 

"So, you're driving a car where you are going to owe a lot more than it's actually worth. So in the end, if something happens, you're in a wreck, someone steals it, anything like that, your insurance is not going to cover that. You will owe the bank on a car you don't really have," said Kelley Martin. 

And if you wanted to trade in or sell before that loan is paid up then you might not get enough money to pay off that loan. So tread very carefully here. 

Is it ever a good idea?  Well, it's not ideal, but this is how it can be used more reasonably, according to our lending expert. 

Only four percent Delta Community Credit Union's clients this use this loan. And they fit this niche market: expensive car, more than $40,000, owner plans to keep it until it dies. Or, maybe it's a specialty car that will be garaged a lot. 

But you have to be able to afford to pay off the loan if something goes wrong, like it getting totaled before payoff.