this post was submitted on 26 Oct 2023
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Those that do loans are much more likely to have negativity equity when trading in. Which is already proven with those who have terms longer than 4 years. This means on trading in, the borrower is looking at an increased car payment on top of the already higher average transaction price of $35,000. If you put money down, default on the loan and lose the car, you've quite literally given away money.
It's true the average loan is 7 years, but within the last few years there are 10 year (!) loans are available. This helps bring down an $800 payment. But that interest is gonna suck if you don't get a very low rate.
Those that pay off their loans tend to keep their cars for 10 to 12 years. Assuming the car doesn't catastrophically fail. Which anecdotally happened to our family. 1.6L Ford EcoBoost defect killed the engine 2 years after a 4 year loan was paid off.
Speaking anecdotally here, I wonder if the banks are trying to push those super long loans, too. I bought my car last year, have excellent credit, and put 50% down. The only loan I was offered was an 8 year loan when I wanted 4. Out of sheer spite, I took advantage of the early payoff and paid it off as early as possible to deprive them of as much interest as possible, and it was much faster than the 4 years I asked for.
As a general FYI for anyone who reads this comment, be aware that bank loans front load the payment of the interest, and the payment of the principal is done on the back end.
So you have to pay off a loan very quickly to avoid the majority of the interest you would pay for that loan.
Finally, if you pay extra to try to finish a loan off early, make sure any extra amount you pay is marked as "principal only". Banks are supposed to always apply any extra to the principal, but a lot of times they apply the extra to the interest, unless you explicitly tell them not to.
In this case, I had a deal that had no penalties for early payoff, so in my case, paying off my car in 1/8 the time saved me 7 years of interest with no serious downside. Unless you count credit scores being BS and paying off loans early technically not being ideal credit management.
Fair enough, but I wasn't actually talking about early payoff penalty. I was speaking to the payback schedule that the loan company has you reimburse them with.
You pay your loan back on a monthly basis. In the earlier years, each monthly payment goes (for example) 80% to interest owed, and 20% owed to principal. Usually around the last fiveish years mark, your payment is applied 10% interest, 90% principal. The bank/loan giver makes sure they get their profit from offering you the loan in the earlier years. In other words, each monthly payment by you is NOT going 50%/50% interest/principal.
Don't get me wrong though, its ALWAYS good to pay off your loan early, from a total $ amount paid when you are done point of view. But if you take ten years to pay off a fifteen year loan, you've paid off most of the interest owed already, where if you pay off a fifteen year loan in five years you've paid less interest owed, % wise.
(The time frames I mention above is estimates for sake of this discussion, YMMV for your actual load, but the principal of what's being said is valid.)