I was baffled when my colleague, Aaron Williams, shared this article with me that he saw on Facebook. A 96-month car loan? That’s 8 years. Think about what you were doing 8 years ago.
Not only would a 96-month auto loan likely be on a brand new car (that’s a whole different discussion), but you’re leveraging a depreciating asset for a long time.
According to an article written in July 2017 by Nicole Arat for NerdWallet, “Your car’s value decreases by around 20% to 30% by the end of the first year. From years two to six, depreciation ranges from 15% to 18% per year, according to recent data from Black Book, which tracks used car pricing. As a rule of thumb, in five years, cars lose 60% or more of their initial value.”
Also, check out this Car Depreciation Calculator that shows how much a vehicle can depreciate in 1 minute as well as the estimated depreciation up to 5 years.
If you bought a $25,000 vehicle utilizing a 96-month loan at a 5% interest rate you would still owe $10,560 on the loan at the end of year 5 while the vehicle would be worth $10,000, using Arat’s rule of thumb mentioned above. The Omni Calculator Car Depreciation Calculator provides the same residual value.
It doesn’t make much sense to me to pay $18,990 over 5 years (the amount you’d pay in principal and interest using the info above) to own something that has NEGATIVE equity. AND STILL HAVE 3 YEARS LEFT OF PAYMENTS.
That’s my rant for the day. Thanks, Aaron.
