In a town where a lot of people drive to the plant before dawn, the truck is not a luxury. It is a tool, and often the biggest bill after the house. So the way you pay for it matters.
At the dealership, the question usually comes down to one number: what is the monthly payment? Stretching the loan longer makes that number smaller. It also makes the total bill bigger, sometimes by thousands of dollars. Here is the math, laid out.
One loan, four lengths
Take a loan of $45,000 at 8 percent interest. (Rates change, and yours depends on your credit, so treat this as an example. The pattern holds at any rate above zero.)
| Loan length | Monthly payment | Total interest paid |
|---|---|---|
| 48 months | about $1,099 | about $7,700 |
| 60 months | about $912 | about $9,700 |
| 72 months | about $789 | about $11,800 |
| 84 months | about $701 | about $13,900 |
Going from 60 months to 84 months drops the payment by about $210 a month. It adds about $4,200 in interest. You pay more to pay less.
Why it works that way
Every month, interest is charged on what you still owe. On a long loan, you pay the balance down slowly, so you owe more for longer, and interest has more time to pile up.
Being upside down
There is a second cost that doesn't show up on the loan papers. Vehicles lose value fastest in their first few years. On a long loan, you pay down the balance slowly. Put those together and you can easily owe more than the truck is worth. People call that being upside down, or having negative equity.
On the example above, after three years of payments you would still owe about $20,200 on the 60-month loan, about $25,200 on the 72-month loan, and about $28,700 on the 84-month loan.
If the truck is totaled or stolen, insurance pays what it is worth, not what you owe. If you trade it in, the leftover debt is often rolled into the next loan, and the next truck starts out even further behind. That is how people end up paying for two trucks while driving one.
Questions to ask before you sign
- What is the total I will pay, not just the monthly payment? Ask the finance office to show it. The law requires the loan papers to list the finance charge and total of payments.
- What is the interest rate, and can I beat it? A credit union or bank may offer a better rate than the dealer. Getting pre-approved before you shop gives you a number to compare.
- What happens if I pay extra? Make sure there is no penalty for paying early. Even $50 extra a month toward principal shortens the loan and cuts the interest.
- Do I need gap coverage? If you are putting little money down on a long loan, gap insurance covers the difference between what you owe and what the truck is worth if it's totaled. Compare the dealer's price with your own insurer's.
- What am I rolling in? If old debt from a trade-in is being added, know exactly how much.
A rule of thumb
Many financial planners suggest keeping total vehicle costs, payment plus insurance plus gas, to a modest share of take-home pay, and keeping loans short enough that you'll own the truck free and clear well before it needs major work. The exact numbers vary, but the idea is sound: the truck should serve your life, not run it.
Overtime and turnaround money make it tempting to buy for the best month of the year. Buy for an ordinary month instead. The truck will still be there when overtime slows down. So will the payment.
Related on HERE
Sources
- Payments, interest and balances computed by HERE with the standard loan formula ($45,000, 8 percent annual rate, monthly payments).
- Consumer Financial Protection Bureau, auto loans: total cost, loan length and negative equity.
- Federal Truth in Lending Act disclosures (finance charge and total of payments).