Vehicle financing terms stretched over seven or eight years present severe financial risks for military service members, according to data from Kelley Blue Book and reporting by Military.com.
With the average cost of a new car hovering around $50,000, buyers increasingly turn to ultra-long loans to secure lower monthly payments.
Service members frequently relocate during their careers, making vehicle financing and long-term ownership a common necessity. However, extending loan terms to 72 or 84 months increases the danger of rapid vehicle depreciation. Borrowers quickly find themselves owing more than the car is worth, a situation known as being underwater on the loan.
“[Y]ou could end up owing more to the bank than the car is worth, even though you will no longer have a car to drive,” according to Military.com.
Rapid depreciation exposes service members to negative equity if a vehicle gets totaled or stolen. Industry analysts recommend following the traditional 20-4-10 rule to mitigate these risks. This formula advises buyers to make a 20 percent down payment, commit to a 48-month loan term, and spend no more than 10 percent of their budget on transportation.
Shorter loan terms help owners build equity faster. Borrowers who stick to four-year terms avoid the trap of paying down a rapidly depreciating asset over an extended timeline.
Lower monthly payments on 72- or 84-month loans often deceive buyers into thinking they are saving money. The silent killer in ultra-long financing is the accumulating interest over the life of the loan. A $50,000 loan at 6.5 percent interest over 60 months accrues $5,290.60 in total interest. Extending that same loan to 72 months at a 7.9 percent interest rate pushes total interest payments to $10,481.67.
“The money you’re saving monthly can be offset by the amount of interest you’re ultimately paying during the length of the loan,” reports Military.com.
Service members can protect their finances by saving for a larger down payment before purchasing a vehicle. Larger down payments offset higher monthly installments required by four- or five-year loan terms. Buyers who already hold a 72- or 84-month loan can explore refinancing options to shorten their terms and secure lower interest rates based on their current credit profile.