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How long is too long when it comes to financing a new vehicle?
Apparently for many buyers there
is no such thing as too long, provided the monthly
payments are kept low. The average length of a
new car loan today is an astounding 70 months,
up from about 62 months a year ago, according
to the Consumer Bankers Association.
On some higher-priced vehicles, nine-year car loans
are starting to appear. And none of these figures take into account buyers who
have taken out home equity loans to purchase new vehicles, often extending the
payments over as many as 15 years.
For anyone concerned about the smart
use of their money, this trend is more than a
little troubling.
At
the simplest level, the longer a loan is extended, the more you pay in interest. Consider
that just going from a three-year loan to a five-year loan on a $25,000 car can
means as much as $2,000 in added interest. With the average transaction price
of a new vehicle for 2007 approaching $30,000, going for a seven-year loan can
mean that $30,000 car will actually cost more than $38,000, even for someone with
excellent credit. Going with a four-year loan would cut the interest cost by nearly
45 percent.
But, another factor involved with
longer car loans is that most people don't keep
their cars until the loan is satisfied, and with
the longer loans they are "upside down''
on their cars -- meaning they owe more than it's
worth -- for a longer time.
If you're upside down on your existing
car loan when you try to buy a new car, the dealer
will usually offer to roll over the balance on
the old loan into the new loan. Last year, buyers
who were upside down on their loans when they
bought a new vehicle owed, on average, about $3,000
on their old loans, compared with $1,700 in 2000
and $600 in 1990.
Conventional wisdom says that a new-car purchase
is the largest transaction anyone will ever make, next to buying a new home. But
unlike real estate, which is almost assured of appreciating in value over the
life of a home loan, cars and trucks depreciate the moment they are bought. So
while it makes no financial sense to extend the life of the loan longer than absolutely
necessary, that reasoning seems lost in today's marketplace.
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