When it comes to their money, some people do inexplicable things. I came across an appalling figure the other day. The average length of a car loan today is 70 months – nearly six years! Now couple that stat with the fact that, on average, people only keep their cars three to five years. If you do that, it doesn’t take a calculator to figure out you’re digging yourself into a hole. Now lets look at leasing vs buying a car pros and cons.
Being ‘upside down’ is the term used to describe when you owe more on something than it’s actually worth. When you’re talking about cars, it can happen surprising easily.
As a rule, new cars immediately lose value as soon as they’re driven off the lot. It takes several months or even a year of payments to owe less than the resale value of the car. For that period of time, you’re upside down. The longer your loan term, the longer it takes to get to the break-even point.
So it seems that what more and more new car buyers are doing is not entirely paying for a car before they turn around and sell it. Then they buy another car and roll the old loan balance into the new loan. After a few cycles of this, you’re driving a Chevy with a Mercedes-size loan.
To put numbers to the point, let’s say you want to buy this nice new Toyota Camry with a loan of $25,000. If you finance for five years at 5.09% (what my bank offers), you’ll be paying $3,369 in interest over the life of the loan. If your loan term is three years, total interest is $2,789. Financing for the longer term nearly doubles the interest you pay.
If you decide to trade in that car after four years, you still owe over $5,520 on the loan. No problem – just roll that into the loan for your new car.
Do this a couple of times and you’ll quickly be driving a car worth half what you owe on it.
Since evidently a great many people are doing just that, it seems they should be leasing instead of buying. At least at the end of a lease you don’t owe any money (assuming you fulfill the terms of the lease). Not only that but you’ll be able to afford more car than you would by buying outright.
Like I said, people do unbelievable things when it comes to money.