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According to the Power Information Network, nearly two-fifths of all new car loans are for terms ranging from 72 months to nearly 78 months. This year, new car loans made by the finance arms of Ford, GM and Chrysler have an average monthly payment of more than $500.
While all of these statistics should cause sleepless nights for some bankers and financiers, buyers should also be very cautious of these same trends.
Many buyers tend to look only at how low the monthly payment will be and how little they will have to put down. In addition, dealers often offer to roll over anything you owe on your current car into the new car loan, a come-on that is one more ingredient in a recipe for potential disaster.
Longer loans and lower down payments equate to a longer period in which you're upside down on the loan -- meaning you owe more than the vehicle is worth.
With an 84-month -- or even a 72-month
-- loan and a minimal or nonexistent down payment,
a buyer will likely still owe more than the car
is worth four years into the loan.
That four-year mark is critical because many shoppers begin to get the new-car itch about four to five years after purchase. However, longer loans make it inadvisable to buy a new car at that time.
Also, these longer loans go beyond the warranty period of many new cars, meaning buyers could be facing car payments and possible hefty repair bills at the same time.
Buyers of sports cars and exotics
may argue that their vehicles hold their values
so well that even after seven or eight years,
they still will have considerable equity. However,
this overlooks how the interest on these longer-term
loans jacks up the transaction cost considerably.
My advice? If you have to extend your car loan beyond five years and can't afford to put at least 20 percent down, scale back your car desires to something you can afford.
If you do this just once on a new car purchase, you likely will be in much better shape for all of your future car purchases.
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