Personal Finance

3 Ways Extended-Term Auto Loans Can Help You Navigate an Expensive Market

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In a market where prices for new and used cars have soared to unprecedented highs, you may have asked yourself if purchasing a vehicle is out of reach. Don’t worry — you can clear the financial hurdles like an Olympic champ and get the car you need.

How does a consumer gain an advantage in this scenario? One tool you may want to reconsider is an extended-term auto loan.

A consumer dilemma

Due to a worldwide computer microchip shortage, production of new cars has plummeted, sending buyers running to purchase used vehicles. But the price of used cars has skyrocketed, putting consumers in a bind.

The Cox Automotive Manheim Used Vehicle Value Index, which tracks the prices car dealers pay for used cars at auction, stood at 223.7 in October – up a red-hot 9.2% from the previous month and up 38% from a year earlier.

With dealers paying more to purchase inventory, those costs often get passed on to you. Here are three benefits of using an extended-term auto loan to navigate this expensive market:

No. 1: Helps you live within your monthly budget

Monthly budgeting is a necessary reality for everyone. For most of us, taking on an expensive car payment to afford a quality car just isn’t in the cards. After all, you’ve got rent, bills, groceries, and other expenses to handle. The benefit of an extended-term loan is that it can chop down your monthly payment to a manageable number.

While many financial institutions don’t offer loans beyond 75 months, there are others that offer more affordable payments with extended terms like 84 and 96 months. More people are considering extended-term auto loans for reasons including:

  • Lower monthly payments
  • More flexibility
  • Ability to purchase a higher quality vehicle
  • Counteract price inflation

No. 2: Gives you peace of mind with increased affordability

For many years, a 60-month loan was considered industry standard. Using that as a baseline, you can determine how much lower your monthly payment would be with a longer-term loan.

As of October 2021, the average new car price climbed to more than $45,000, according to data from Kelley Blue Book and TrueCar. That’s an all-time high — up from about $41,000 in July. But that’s not all. The median personal income in the United States dropped from $36,426 in 2019 to $35,805 in 2020. Higher prices for new and used vehicles have coincided with less income for the average person.

How can you make that car purchase fit within your budget? 

The following is an example of a monthly payment comparison between a traditional 60-month loan versus extended-term options if you take out a $35,000 loan at a 5% interest rate with no down payment:

Loan term: 60 months Loan term: 84 months Loan term: 96 months
Monthly payment: $660 $495 $443

You may spend more than your car’s sticker cost over the course of the loan due to interest payments. So if you need a more manageable monthly payment right now, an extended-term loan could be an excellent solution.

Extended-term loans have become more popular now that the lifespan of cars is also increasing. As drivers continue to comfortably push newer vehicles well past 150,000 miles, adding an additional 24 or 36 months to a loan term is now a more practical option.

No. 3: Provides additional advantages you probably won’t get with leasing

Leasing a vehicle is a popular practice, and it’s another way to secure lower monthly payments. However, it’s important to consider the disadvantages of leasing – many of which may not be well-known to consumers.

The biggest difference between a loan and a lease is ownership. When leasing a vehicle, you are renting it for a predetermined amount of time, usually 36 months or less. With a loan, you’re paying toward owning the vehicle, and once the loan balance is paid in full, you don’t make any more monthly payments.

Drawbacks to leasing

  • If you continuously lease vehicles, monthly payments never stop
  • Mileage limitations and fees may make it costly
  • Fees are added for any damage beyond normal wear and tear
  • Breaking a lease early could be excessively expensive
  • You may have less flexibility with your contract

Is an extended-term loan right for you?

You have options for your car purchase. Those include loan, lease, and balloon financing.

Have a significant daily commute? Enjoy driving on vacations instead of flying? These are important factors when considering a loan versus a lease. With a lease, you need to have an idea of how many miles you’ll put on the car due to mileage restrictions.

If you go over a set amount, you’ll be charged for each additional mile over your limit. Typically, dealerships have annual mileage limits between 10,000 and 12,000 miles, although higher mileage limits are also available.

Another way to lower your monthly payments is through balloon financing. Like a lease, the balloon loan payment is calculated only on a portion of the vehicle sales price, and the balance, or residual value, is due in whole at the end of the loan term. Simply put, a balloon payment is a large lump-sum payment at the end of your loan term. While this is likely to result in reduced monthly payments, it’s a risky option.

With a lease, the longer you have the car, costs can pile up for repairs and maintenance. You could be responsible for most or all of those costs, depending on the terms of your lease agreement.

With a balloon payment, unless you’re a high-income earner, a sudden large payment due all at once may not work for you or your budget. The month-to-month affordability that comes with balloon financing can be offset by that imposing final bill.

You can also choose an extended-term loan. Financial institutions like Axos Bank offer extended terms of 84 or more months, providing you a path to lower monthly payments and some breathing room for your monthly budget. Are you ready to review your auto loan options?

Axos is here to help with your refinance. Apply now and receive your personalized offer in minutes. Call 844-517-5556 to get started.

3 Ways Extended-Term Auto Loans Can Help You Navigate an Expensive Market

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