Heard an ad the other day for a 75 month car loan.. that's 6 years 3 months folks! I did a quick analysis using loan amortization calculators and data from edmunds
. The graph on the left shows the loan balance vs. the worth of the car. The lowest line is the difference between the two. As you can imagine, if you used this loan, you would be in the hole right off the bat, partially because a car depreciates the moment you drive it off the lot and partially because you'll have to pay sales tax, depending on where you live.
So, in this example, here's the gap between how much you owe and how much the car is worth:
Day 1: a little under $10,000
Year 1: a little over $10,000 (yes, it went up)
Year 2: about $9,000
Year 3: $7,500 and by now your bumper-to-bumper warranty has run out
Year 4: $4,400 (finally starting to come down)
Year 5: $1,100 Note that with most "normal loans", your car would be paid off by now (your loan balance with this loan: $6,700)
Year 6: By now your car is worth more than the loan. You still don't have it paid off though, you owe $1400 at the end of year 6. After 6 years, your car probably has 90,000 to 120,000 miles on it.
In conclusion: 75 month loans are for suckers. Don't do it! For that matter, buying a brand new car isn't very smart either, but that's for another post.Details on the analysis: All values from edmunds for Ford Explorer XLS (base). Used average retail value for 2006 + taxes for initial loan amount. Used average trade-in values for years 2006-2000 to determine residual value.
Check out this blog post about being upside down on a car loan
. Scary Statistics.