Tips & GuidesHigher Car Prices Cause Loan Terms To Spiral

Higher Car Prices Cause Loan Terms To Spiral

April 06, 2022

As crazy as it sounds, used car prices in Australia increased by as much as 37% between February 2020 and the end of 2021.

Let’s stop and take that in for a moment.

Thirty-seven per cent.

Say you bought a used car for $30,000 at the start of 2020. If you wanted to pick up a car of the same calibre today, you could expect to pay $10,100 more for it, shelling out as much as $41,100 for the privilege.

So, how did we get here?

Why Have Used Car Prices Increased?

First up, the car industry has been hit by a global shortage of semiconductors. Also known as microchips, these semiconductors are a crucial part of modern cars.

The reason behind the shortage is, of course, COVID. The pandemic sent manufacturing plants around the world into lockdown, which in turn, disrupted supply.

Further disruption was caused by pandemic-related restrictions on international ports and borders, which prevented those car companies that managed to continue production from transporting their vehicles around the world.

So, as newer cars became harder to come by, demand for used cars increased. That demand was also spurred on by car buyers looking for an alternative to public transport during the pandemic, and a shift towards driving holidays rather than overseas flights.

Demand is higher, supply is lower, and prices have shot up as a result.

According to chief executive of the Australian Automotive Dealers Association, James Voortman, this increase has been felt across the industry in Australia – but the price hike here is not as bad as in other countries.

“Price increases in Australia have been around 10 to 30% depending on the cars, but it hasn’t been as bad in Australia as it has been in the US where we’ve seen much, much larger inflation,” he said.

Higher Prices, Longer Loans

The higher costs associated with buying a car over in the US has led many car buyers there to opt for longer car loans to make their loan payments more affordable.

According to US-based Experian Automotive, car loan terms of 73 to 84 months accounted for 33.1% of new vehicle loans by the end of 2021, up from 30.1% a year earlier, and 29.7% the year prior.

Why Choose a Longer Loan Term?

As you compare car loans, it may be tempting to opt for a longer loan term to reduce the amount you pay back each month. However, by stretching your loan over a longer term, you may end up paying more in interest overall.

Let’s look at an example.

Carrie takes out a $30,000 car loan over four years, at a fixed rate of 8% p.a. Her monthly repayments (excluding fees) would be $732. Over that four year period, she would pay $5,155 in interest on the loan.

Opting for a seven year loan, Carrie’s monthly repayments would be $468. The total overall interest cost on this loan would be $9,277 – meaning Carrie would pay $4,122 more on the loan overall.

Aside from the higher interest costs, it’s also worth bearing in mind that stretching your car loan will result in you staying in debt far longer. If you take out a seven year car loan today, you would make your final payment in March 2029.

Having that kind of debt in your name over a longer period can also affect your credit – and your ability to apply for more credit, should you need it. It can also make dealing with your monthly finances more of a challenge, having to set aside money in the budget for your car loan payment year after year.

On top of all that, it’s worth thinking about the lifespan of your car. If you buy a three year old car now, will it still be running in seven years?

How To Choose the Right Loan Term

Unsure how long you want your loan term to be? At Car Loan World, we can help with that! By helping you compare the options on a range of car loans and loan terms, we can help you find the best match for you.

Author

  • Roland is the founder of Credit World Pty Ltd and a leading financial expert in Australia. He has extensive knowledge on car loans in Australia. Known as a car loan expert, Roland has been featured on TV and in various publications. He started in finance comparison in 2005. Now a 17 year industry veteran.