97-Month Car Loan A Bad Financial Idea, Unless You Like Debt

The 97-month car loan is a bad financial idea unless you enjoy being in debt.

As previously reported by The Inquisitr, the 97-month car loan is becoming popular because the Federal Reserve has slashed interest rates and investors and banks are looking at getting a higher return on their investment. This comes at a time when student loan interest rates are doubling.

If you have ever been car shopping you will probably have noticed the car salesman will begin negotiating price not by asking how much you want to pay in total for the vehicle, but how much you can afford on a monthly basis. Experienced car buyers will mentally think, “It’s a trap!”, and shift the conversation toward the actual overall expense involved.

When you’re buying a vehicle it’s not just the sticker price and the option of a 97-month car loan giving you low monthly payments (as they like to advertise). You have to consider taxes, dealer fees, and especially the interest you will pay in the long run. While the “low monthly payments” sound nice, it’s possible in the long run you’ll be paying much more than expected.

A 97-month car loan is essentially a financial commitment for a little over eight years (why they don’t make it 96 months in order to keep it an even eight years, I have no idea). A longer term loan presents higher risk for the bank so they typically compensate by raising the interest rate, which also fluctuates based upon the credit score of the individual.

According to BankRate.com a 97-month car loan is atypical, with the 60-month car loans for new cars averaging a 4.12 percent interest rate. As an example, let’s say you buy a new car for $20,000 with a 97-month car loan that has a five percent interest rate. This may not be realistic. Subprime borrowers, or those with bad credit history, may pay as much as 20 percent in interest.

Like mortgages, a 97-month car loan would amortized, which means the bulk of interest payments are shifted to the beginning of the loan period. Because of this, another consideration is that borrowers take a longer period of time to reach the point where their debt on the car is less than the value of the car they own (as in, the equity). This would make it very difficult to sell or trade the car.

In any case, the interest rate applies on a yearly basis. Assuming you go through the entire 97-month car loan, you’re essentially paying $1,000 a year in interest for that $20,000 car. After eight years the total cost of the vehicle will be $28,000. A subprime borrower with a 20 percent interest rate would pay $52,000, more than double the sticker price.

A 97-month car loan doesn’t sound nearly as attractive anymore, now does it?