The Consumer Financial Protection Bureau urges borrowers to consider total loan costs and not just monthly payments as longer car loan terms become more common, potentially increasing overall debt and interest payments.
It is easy to fixate on the monthly figure when shopping for a car loan, because that is the amount that will come out of a bank account each month. But the Consumer Financial Protection Bureau says borrowers should look beyond the instalment and judge the full cost of the debt before signing.
The bureau says the key numbers are the loan amount, the annual percentage rate, the loan length and the monthly payment. A longer term can make a car appear more affordable from month to month, but it also means interest has more time to build up. In the bureau’s example, a $40,000 loan at 6% APR costs about $773 a month over five years, with roughly $6,400 in interest. Stretching the same loan to seven years cuts the payment to about $584, but raises total interest to about $9,085.
That warning matters because long car loans are increasingly common. Edmunds said in July that 36.5% of financed new-vehicle purchases in the second quarter ran for 73 months or longer, while 23.9% stretched to at least 84 months. The average monthly payment on a new car also hit a record $777, underscoring how borrowed money can remain a drag on household budgets for years.
The CFPB also advises shoppers to look at the broader picture, including trade-ins, down payments, insurance and maintenance, before deciding how much to borrow. It recommends comparing offers from multiple lenders and, where possible, getting pre-approved before going to a dealership. That can improve bargaining power and may help buyers avoid financing more than they need.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
