Ten years ago most auto financing programs had a maximum term of 5 years. Generally speaking, this meant that the car would depreciate with the loan at an even pace. More recently, Car dealerships are now offering extended financing periods of up to 84 months. What is happening now with these loans is that the vehicle is depreciating quicker than the loan is being repaid. So when consumers go to trade a vehicle in, they own more than the trade in value of the vehicle and have to either settle that difference or add the value to the new car loan. For example, if a client had a shortfall of $5,000 and wanted to purchase a new vehicle valued at $30,000, they can assume a new loan for $35,000, and finance that over 84 months again.
Flash forward 5 years down the road and that vehicle is now worth $15,000 and the loan is at $25,000. They now owe double than they did with the trade in, and the process could start over again, effectively leaving the consumer with an asset that will not cover the loan against it. Selecting a lower loan repayment term is the only way to avoid this. Short term you will pay more on a monthly basis but long term you will ensure you don’t end up owing more than what your vehicle is worth.