Even before COVID-19 reached our shores, car loans in the U.S. were being stretched out longer than the recommended 5-year term, climbing to an average of 70 months. As the COVID-19 crisis drags out and economic conditions become more uncertain, car sales have taken a significant dip, and automakers are concerned. In response, nearly every major manufacturer is offering special financing deals to give shoppers lower payments and more confidence to pull the trigger. Some are even offering loan terms of 84-months (7 years) with 0% APR financing. Is this deal too good to be true?
Special Financing Offers
Automakers like GM and FCA have been promoting 84-month 0% APR financing incentives in addition to payment deferral for anyone who loses their job due to COVID-19. Through GM's financing arm, the automaker is offering 7 years of 0% financing on Buick, Cadillac, Chevrolet, and GMC vehicles which is two years longer than standard financing offers. FCA also announced the 84-month 0% APR financing incentive on most Chrysler, Dodge, Jeep, and Ram models.
Some stipulations to these deals include that the vehicle must be financed through the automaker's lending arm, and the 0% APR deal is for well-qualified customers only. This means those with excellent credit can take advantage of 0% interest, but shoppers with compromised credit will not be eligible. The automakers' strategy of stretching out a car loan over 7 years is meant to give customers a sense of security that they'll be able to keep up with payments, but it may be a false sense of security.
According to Bloomberg, at the start of the COVID-19 pandemic in late March, 23% of new-vehicle buyers took out 84-month loans to finance their purchase. Prior to the crisis, loans that long accounted for only 7 to 8%. While the offers are real and some car shoppers are taking advantage, it's not necessarily the best course of action, especially for those who don't qualify for the 0% APR deal.
Is a Long-Term Car Loan Worth It?
Shoppers with excellent credit can consider the 84-month 0% APR deal, but those with compromised credit should be wary. When a car loan is stretched to 84-months for a shopper with bad credit, the interest rates rise and accumulate over time. According to Edmunds, this has not stopped shoppers from moving forward. Edmunds experts note that the share of sales with APRs of 10% or higher saw a lift in March, accounting for 12.8% of sales compared to 10.7% in February. Loan terms also increased in March, surpassing 70 months for the first time on record. The share of borrowers who had a 73- to 84-month loan rose to 35.3% in March vs. 32.8% in February.
The problem with choosing an 84-month car loan without being eligible for the 0% APR is that the overall cost of the auto loan will be much higher due to the climbing interest rate. This puts borrowers at risk of overpaying by hundreds or thousands of dollars, going underwater on the loan, and falling into a cycle of debt. We know putting off a car purchase isn't always an option, but there are more practical alternatives to a long-term loan.
If you don't qualify for the 0% APR offers, there are other steps you can take to get an affordable monthly payment on a vehicle. Many automakers give a choice of 0% ARP financing or cash back offers and you can look for these widely available cash back discounts instead of taking on a long-term loan. Another smart move is to prepare a substantial down payment for the vehicle which will reduce your monthly payments, making them more manageable. A vehicle down payment can be a practical use for your recently received COVID-19 stimulus check.
The 84-month 0% APR financing deals are available on new vehicles, but shopping for a used car can be another way to reduce your monthly payments. According to KBB, the average price for a light vehicle in the United States was $38,948 in December of 2019. Although the average used vehicle price has also climbed, it has remained much lower at $20,683. Due to the pandemic, used car values are currently dropping, so it may be a good time to find a deal for the essential transportation you need without putting your finances (and future) in jeopardy.