If you’re financing a car this month, the finance office is going to show you something that looks like a favor. Stretch from five years to six, and the interest rate goes down instead of up.
The sheet is correct. Pricing the long loan cheaper is the easiest way anyone has found to sell you a bigger one.
The Federal Reserve tracks what banks actually charge on car loans, and the numbers it put out on August 7 cover the second quarter of this year. The average 60-month new car loan at commercial banks came in at 7.14%. The average 72-month loan came in at 6.97%.
The longer loan is now the cheaper rate.
That’s backwards from how lending works everywhere else. More years means more time for you to lose a job, total the car, or stop paying, so more years normally means a higher rate. It was that way at the end of last year, when 60 months ran 7.24% and 72 months ran 7.50%. In the first quarter the two tied at 7.53%. This quarter the spread flipped.
Why? Because almost nobody shops a car loan on the rate. They shop it on the payment. Drop the rate on the long term and the monthly number falls twice, once for the extra twelve months and once for the cheaper money. The buyer sees a smaller payment and a smaller percentage on the same page and stops asking questions.
Price that trade out.
Take a $40,000 loan. At 7.14% over 60 months, you pay about $795 a month and roughly $7,682 in interest. At 6.97% over 72 months, you pay about $681 a month and roughly $9,060 in interest.
So the longer loan saves you $113 a month and costs you about $1,378 to do it. On a $30,000 loan the gap is around $1,034. On $45,000 it’s around $1,550.
Both numbers hold at once, which is the whole trick. The rate is lower and you still pay more, because a rate is a price per year and you just bought another year of it.
This is questionable, not automatically dumb. If the six-year payment is the difference between a reliable car and a gamble, take it and know what you paid. If you’re stretching to afford a nicer trim, you’re buying $1,378 of car with $1,378 of interest.
Run both terms through our loan calculator before you sit in the finance chair, using the actual amount you’ll finance after your down payment and trade.
Then do the one thing that ends the conversation: ask for the total finance charge at 60 months and at 72 months, in writing, side by side. Not the payment. The total. Lenders have to disclose it before you sign, and the sheet that shows both numbers next to each other is the sheet nobody hands you unprompted.
If the finance office will only talk in monthly payments, you already know which number they’d rather you look at.
More on picking a lender in our loans hub and our best loan offers page.
The Fed’s figures come from its G.19 consumer credit release, which surveys commercial banks quarterly on what they charge for new car loans, personal loans, and credit cards. The car loan rates are averages across reporting banks, so your quote will move with your credit, your down payment, and whether the dealer marks the rate up before showing it to you.
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