In May of 2021, the average new car transaction price was $41,263 and the average used car transaction price came in at $25,410. Even if a credit-challenged person buys a much cheaper vehicle, two ways are extending the loan term will be more expensive.
1) You agree to buy a car with a selling price of $17,500, you put down $1,500, and want to finance the remaining $16,000. You’re approved for 15.99 percent and finance for 48 months. Your payment will be $453 a month with interest charges of $5,761 over the life of the loan.
In the above example, each additional year you stretch out the loan will add roughly another $1,440 in additional interest charges. If you extend the loan to 60 months, your payment will only be $389 a month, but your interest charges shoot up to $7,340. Looking at extending to 72 months, your payment is $347 a month and your interest charges are $8,983, over half of the amount of the vehicle’s selling price.
2) The second way stretching out an auto loan term can hurt you if you’re credit-challenged is the longer the vehicle is financed, the longer it will be worth less than what the payoff amount is. What this means is even if you’ve obtained your goal and reestablished your credit after a couple of years. You still will not be able to trade in the vehicle because you still owe way more than what the vehicle is worth (upside down).
If you’re unable to come up with cash to make up for the negative equity you may be trapped in your vehicle, paying the higher rate, or risk messing up your credit you just worked so hard on reestablishing.
If you’re in a below-average, bad credit, or no credit situation and not careful…You could end up paying a lot more in additional interest charges compared to what a prime borrower would pay financing the same vehicle. Review my bad credit auto loan approval guide to learn how to increase your chances of being approved for a bad credit auto loan and also what to expect if you have bad credit.
Visit my Auto Finance Tips Section to read more on how dealers make money financing cars, how your credit report affects your interest rate, common auto finance mistakes, and more.