Car loan tenures are getting longer. That’s a fact. Whether or not you think that’s a good thing, however, remains disputed.
Experts will usually argue that increasingly long loan tenures are a problem. You want to keep your loan term as short as possible, they argue, to reduce costs and increase your flexibility.
Some will even go as far as to suggest that any loan longer than 36 months is a mistake.
All the same, loan tenures have gradually been edging upwards. Today, it is not entirely uncommon to see contracts with an eight year run.
If long car loan tenures are really that bad – why are so many people drawn to them like moths to a flame?
There’s no need to argue that shorter tenures are cheaper.
Many of our customers prefer to take their time with paying back a loan. We fully understand and cater to their preferences. And yet, it is completely clear that this means they’ll have to pay a bit more compared to a shorter loan.
Why is this?
It’s very simple, actually. For one, the longer the loan term, the longer you’ll be paying interest. Everything else being equal, every month you add to your tenure will make itself felt.
Longer loan terms lead to uncertainty.
A longer loan term feels more risky to a lender. It is hard enough to assess your creditworthiness in the present moment, they will argue. Let alone assessing what it might be eight years from now. So much can go wrong in the meantime.
Longer loan terms add an element of uncertainty to the equation. Finance providers hate uncertainty.
What this means is that loans with a longer tenure tend to have higher interest rates. Which, in turn, reinforces the impact of interest acruing over several years.
All in all, if you are out to keep your interest payments as low as possible, you should pay off your credit as quickly as you possibly can.
We do acknowledge this. And still, we advise almost all of our customers to be more patient and take their time.
Interested in finding out why we do this? Then read on.
What are the other benefits of a shorter tenure?
Okay, so shorter loan terms are cheaper. What else?
One other thing that short credits have going for them is that you become the owner of the car faster. This may not seem to matter that much at first. After all, you will be able to use the vehicle either way.
But it’s hard to argue against the idea that ownership does have its perks.
For one, you can change the car any way you want without having to ask anyone for permission or for fear of sanctions. Change the upholstery? Add a few extras? Opt for a different colour? Just do it.
What’s more, owning the car gives you the right to sell the car.
This can come in handy if you suddenly need cash. As the recent Corona lockdown has proven, this is by no means an unrealistic scenario.
Selling a car with outstanding finance, on the other hand, is illegal. If you really do need to sell, you must contact the finance provider and there are strict guidelines to consider.
Failing to do this can result in criminal prosecution. But even if you do take the legal route, you may end up losing a lot of money.
This is why the right to sell is so valuable.
The benefits of driving debt-free
And finally, as soon as you’ve paid off the loan, you are debt free on the car. This instantly alleviates your monthly financial burden. You can now use the car without having to transfer any loan instalments.
Of course, driving will never be free. There are still the costs of gas and insurance to pay. But still: You’ll feel the difference immediately.
The sooner you become debt free, the sooner you can reap the benefits.
Finally, the shorter the loan term, the lower depreciation and the more you should, theoretically, be able to get when reselling the vehicle.
All of this sounds great in theory. But:
The experts need to get realistic.
It is okay for financial experts to set out an ideal. And so, if they believe that 2-3 years is best, then that’s okay.
However, what use is there in postulating these ideals if no one seems to be able to heed them?
As Car and Driver has reported, the trend towards longer and longer loan tenures is real:
“Three and five year loan terms were the average for most car buyers in the past, but longer term auto loans are a rising trend. In 2019, the average term length was 69 months for new cars and 65 months for used vehicles.”
The divide between what drivers are supposed to do and what they are, in effect, actually doing is more than 100%. Clearly, it would make sense for the experts to think about the reasons which are leading so many in the UK to foreo these principles.
The car market has become more flexible.
One reason why more people are taking on longer loan terms is simply that they can.
In the past, you could chose between a private loan and a dealer loan. That was it. And for many years, the latter wasn’t even a serious option. What’s more, loans had to be paid back within 3-4 years, 5 years max. Anything longer than that was considered a scam.
Today, there are more financial products than ever. This has freed the market up and created an unprecedented diversity.
Next to buying a new or used car, you can lease it, opt for HP or PCP, consider In-House dealer finance or go for regular car finance from a car dealership. Needless to say, a regular bank loan is still an option, too.
Similarly, just about any loan term is possible in theory. Anything between 24 months and 72 months is considered standard. But there have been reports that 96 month tenures are gaining ground. (They’re probably a bad idea, though.)
If a longer term is what you want, then you won’t have to look too far to get it.
The benefits of a longer tenure
And there are a few pretty good reasons why you would want precisely that.
It is true that lenders are afraid of longer tenures because they suspect you could default at some point. However, this is short-sighted. By driving up your monthly payments, shorter tenures are, in fact, more risky for borrowers. Yes, you’ll pay less and become debt free faster if all goes well. But if you get laid off next week, you are facing an uphill battle to keep the instalments coming.
Longer terms reduce your monthly burden. Which means you stand a better chance of getting through a rough patch.
Besides, you may sometimes not even have a chance. The difference in loan repayment between a 36-month and a 72-month loan can be considerable. Many in the UK will simply not be able to afford to cough up the repayments required for the former.
Finally, smaller monthly payments leave more money for other purchases. This may sound somewhat beside the point, but it is not. Everyone needs to be able to go for a drink or to the movies sometimes. We all need a little luxury from time to time. If everything you earn goes straight into paying off your ride, then this quickly creates frustration.
So what is best, a long or a short tenure?
Ultimately, you should base your decision on the specifics of your financial situation. At Concept Car Credit, we deal with many drivers who are experiencing financial difficulties or who can’t get a good loan because of problems in the past. These drivers will do better with longer loan terms.
Still, we believe that you should keep the length of your loan down.
Whenever possible, you should aim at the best of both worlds. This is not as impossible as it may sound.
Here’s a 5-step plan which keeps monthly payments to a minimum while avoiding the high costs of a very lengthy loan tenure.
Step 1: Buy used
We shouldn’t really be telling you this, but just in case, here’s our warning again:
Never ever buy a new car (unless you’re a millionaire and even then we wouldn’t recommend it).
By buying a three-year old car you can save up to 40% of the original price. Despite this incredible discount, these cars will feel as good as new. Even a five year old car is still incredible. And it can reduce the purchase price even more.
The lower the price of the car, the faster you can pay it off – it’s that simple.
Step 2: Buy a reliable, but unsexy model
We all want to drive beautiful cars and not have to worry about the financial consequences. Unfortunately, that’s just not possible.
A BMW may make you look sexy and a Porsche outright irresistible. But let’s face it: We’re never going to drive those cars.
So instead of “living your dreams”, try to see the pleasure in driving a car that is fun and reliable.
Many brands have shifted their image in that direction anyway. So there are plenty of models to choose from.
Step 3: Play with depreciation
Depreciation is usually considered your worst enemy. Supposedly, the moment you drive your brand new car off the lot, it will already have lost 10% of its value. (We have no idea who came up with that claim. After all, how do you arrive at that number?)
However, if you’re smart, you can put depreciation to your advantage.
If you’re buying new (which we stressed you should never do, we know, but still …), then a car which minimises depreciation is probably best.
But if you’re buying used, then you can put depreciation to your advantage. Simply buy the car at the perfect cut off point: There is a moment in every model’s life cycle, after which depreciation no longer matters. It’s almost as if buyers no longer care if the car is eight years old or twelve or fifteen.
If you buy the car very close to that point and keep it in great shape, you can resell it at almost the same price you bought it for. This can be an excellent way of offsetting disadvantages of a long loan term.
Step 4: Drive the car as long as possible
As we mentioned, one prime benefit of a short loan term is that you’ll be able to drive the car debt-free for longer.
This may be so. But if you drive the car for a very long time, even longer loan terms can be okay.
The main issue is that many people like to switch cars every few years. It’s easy to see why – a new car is always more exciting than an old and familiar one – but at the same time, it makes driving a lot more expensive.
If you buy the right model of a used car at the right time, keep it in great shape and then drive it for as long as possible before selling it at an excellent price, you won’t even have to worry about the tenure of your loan anymore.