Long Term Loans vs. Short Term Loans: Which Should You Focus On?

Image of Skip Soucie
Skip Soucie

What do you think makes your dealership more money on financing options for your customers - low monthly payments or less-costly payoffs? The answer likely varies based on buyer's specific needs (or at least it should), but research now shows one is likely better than the other when it comes to making more money.

AAA has come out with a great study on loan terms lately and which one is best for your customers. Let's breakdown the major takeaways.

Long-Term Loans vs. Short Term Loans

The length of the loan term directly affects buyer's costs, and, essentially, the longer the loan term, the more costly it is for customers. So, what does this mean for dealers? 

The average monthly cost of owning a car is just over $750, and with cars depreciating around $3,334 a year, time isn't necessarily on the buyer's side.

Loan terms extrapolate that yearly cost of ownership. Essentially, every year on the loan adds around $1,000 dollars to the average financing costs the buyer has to cover in the long term.

The Rundown On Long-term Loans

Long-term loans mean your customers pay smaller monthly premiums, so it's much easier to actually sell your cars. However, longer term loans mean the buyer takes longer to potentially sell or trade in that car back to your dealership, so you're making less money on it in that regard.

Buyers are likely to jump on these offers because the monthly payments are the more budget-friendly, buyer-centric choice, but they often don't realize they'll pay thousands more in interest over the lifetime of the loan.

The Rundown On Short-term Loans

The inverse is true for short term loans - higher monthly payments mean it's harder to sell the car. At the same time, buyers acquire equity in their vehicles sooner and can trade them in at your dealership while the car is worth more money.

Now, if you're selling a car with a high price-tag, getting buyers to bring it in once they've paid it off may outweigh the variations, but that isn't always the case. As well, buyers that are more focused on smaller interest payments may be forced into getting a car that's not their first choice; therefore, leaving them less satisfied.

Which Should You Focus On?

Our recommendation? Don't buy into the hype that "short term loans are better". The odds of a buyer actually paying off their vehicle and trading it in at your dealership is much less than the odds of you selling a car to the folks already walking through your door. Waiting for cars to get traded back in doesn't often pay off, and when it does, it's often not that much better than simply focusing on maximizing your sales.

However, we also recommend breaking down the actual cost of ownership for the buyer, not just showing them the bottom line numbers of both loan terms. Buyers that see you going the extra mile to show them the practical, month-to-month cost of owning your vehicles have all the more reason to trust you and buy.

Here are the numbers that you should be showing them:

  • Monthly payments
  • Total interest & principal costs
  • Estimated vehicle value at the end of the loan term
  • Model specific estimated depreciation rate

Helping that buyer make the best, most informed decision will always be the best thing you can do to sell that car.

What about you? What loan terms have you found customers are more satisfied with and why? Let us know in the comments below!

Get in touch with us to find out how to incorporate quality, creative selling strategies into your dealership, and stay on the lookout for more Edifice Insights.

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