Turns Out A Lot Of You Are Extending Your Car Loan By At Least Two Years

Paying back a car loan is getting harder for buyers in the US, and to make the numbers work, many are stretching their loan terms to fit what they can actually afford each month. Fresh data puts some hard figures to the problem and shows how the cost-of-living squeeze keeps digging into household budgets.

Read: The Average New-Car Loan Jumped $2,150 In A Single Year

A recent CDK Global study surveyed more than 1,000 car buyers in the second quarter about their monthly budgets. While 47 percent said their original payments fit within their budgets and left them satisfied with the initial loan terms, another 41 percent admitted they had to extend the loan just to afford it.

Of those, 19 percent extended their loans by an extra 12 months, while 11 percent added two years. Some increased the term even further, with 6 percent by 36 months, 3 percent by 48 months, and 2 percent by more than 49 months. In total, nearly one in four financed buyers added at least two years to their loan term.

The Hidden Cost of Stretching It Out

While extending the term of a loan will reduce monthly payments, it also dramatically increases the amount of interest someone will pay over the life of that loan. Borrowers also take longer to reach positive equity, leaving them financially tied to the vehicle for more of the repayment period.

This highlights just how important it is to settle on a loan that you genuinely can afford, even if you go through a period of unemployment. It’s also bad news for dealers, as the longer the loan, the longer it will take for that buyer to return to the market, and likely the same dealer, to replace the vehicle. CDK Global says dealers are increasingly discussing the advantages and drawbacks of lengthy loan terms with customers.

What About Those Who Lease?

The same study from CDK Global also looked at the behavior of those who lease new vehicles. The study notes that, in general, those with leases are used to higher payments because they’re often luxury-car buyers. Leasing also appeals to customers who want to replace their vehicles more frequently and view the arrangement as a short-term proposition. As such, only 6 percent need to extend their lease terms to keep the payments within their budgets. In general, those with leases prefer other methods of reducing their payments.

For example, 37 percent say they have taken advantage of lease incentives and manufacturer deals, while another 37 percent say they have increased their down payments to reduce monthly payments. In addition, 11 percent have negotiated the sales price, 6 percent have shopped for a higher residual value, and 1 percent have targeted an outgoing model-year vehicle.