- John Mendel, Honda's U.S. sales chief
Mr. Mendel elaborated on the fact that competitors are doing stupid things to increase sales, including extending loan terms to seven years. According to him, automakers are increasing sales by offering 84-month loans that reduce monthly payments and make it difficult to repay the loan early. He continued, """"You're ringing the bell on a new-car sale, but that customer is saddled - they're so thin.""""
John Mendel's interview at the 2015 North American International Auto Show has shed light on a crucial aspect of the present-day auto financing industry. Several auto financing companies are extending loan terms in an effort to boost their sales. They attract customers by emphasizing lower monthly payments while ignoring the high interest rate component of the offer.
What Are the Facts Regarding Extended Loan Terms?
Extended loan terms or longer loan terms are desirable because they make it possible to purchase an expensive automobile with smaller monthly payments. However, before committing to such a loan program, it is essential to comprehend its realities.
>> The inverted loan situation
When you have an upside-down auto loan, you owe more to the lender than the car is worth. In the event that your vehicle is totaled in an accident, you will still be responsible for repaying the loan. It means you will be required to pay for a vehicle you no longer drive.
If you choose a longer loan term and lower monthly payments, you will end up with an upside-down auto loan. This is due to the fact that lenders will apply monthly payments to the interest and not the principal.
The negative equity circumstance
In the first few years, a car depreciates at a greater rate. And if you opt for longer loan terms, your monthly payments will be lower. Consequently, the outstanding loan balance will not decrease rapidly. It will result in a negative equity situation. Remember that it is more difficult to trade in a vehicle with negative equity because it cannot reduce the cost of the new asset.
>> The elevated interest rate situation
Consider that the amount of your loan is $20,000. If the interest rate is 5% and the term is seven years, you will pay a total of $3,744.97 in interest.
Now, let's assume that your loan amount and interest rate are identical to Scenario 1. If the term of the loan is shortened to four years, you will pay $2,108.12 in interest. Therefore, it is prudent to choose a shorter term and save money in the long run.
Now that you are aware of the reality of extended loan terms, it is best to avoid them. Remember that the big picture is always what matters."""