According to data from Experian, used cars are increasing in popularity. As the price of new cars continues to rise, the sale of used vehicles is increasing. But the price of these cars is going up too, which is resulting in more consumers turning to long-term finance to pay for them.
In the report, the data shows that the average cost of vehicle loans is rising for both new and used cars. The average loan for new vehicles increased by 3.8% in the last quarter, now standing at $32,480. For used cars, the increase was 2.3% with the average figure now being $20,466.
In terms of monthly repayments, the credit agency categories these by costs, with $393 – the current average – being “high”. Because of this, many buyers are choosing to extend the total term of their loans to get a lower payment. But this comes at a long-term cost.
As the miles on a vehicle go up, the value will go down. So, if someone pays off their loan more slowly, chances are, at some point, they will owe more than the vehicle is actually worth. This means that they won’t be able to sell it or trade it in without paying out the difference.
Many finance providers won’t give loans of seven years or over, especially if it’s for a used vehicle. They say that this is a bad deal for consumers, and it’s important to point out that the risks are high.
In, the “20-4-10 rule” still applies, which means that buyers need to make a 20% deposit for a four-year loan as long as the payments are over 10% of their household income. Experts say that if someone can’t make these payments, they can’t afford the vehicle.
However, extended car loans go against this trend and apply different rules and, due to higher new car prices, the financing of used vehicles has increased by 2.4%, making up 55.15% of all auto loans. Financing for longer periods of time has, therefore, become the trend.