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To calculate whether a longer term loan is the right
move for you (and your car), you want to look at how you use a car,
how often you trade, plus the resale record of the specific make
and model. In addition, just how much money do you realistically
plan to put toward a car payment every month?
The typical long-term loan buyer is "more likely someone who expects
to drive the car for a long time," says Paul Taylor, chief economist
for the National Association of Automobile Dealers. It's also more
typical for select or "cult" cars that either appreciate or don't
lose value in the usual manner.
For the regular buyer and the regular car, a long-term
loan is "out of sync with the typical ownership cycle," Taylor says.
People tend to keep a vehicle about 4.8 to 5.5 years, he says. Typically,
they sell it about three months before the loan is paid, he says.
Some consumers
may also be using longer loan
terms to get into cars they
might not be able to otherwise
afford. If you've got your heart
set on a luxury sedan and, after
the down payment, you need to
finance $30,000, a three-year
loan at 3 percent will cost
you $872 per month. If you could
pay it over seven years at 6
percent, the payment drops to
$497. But don't forget, it also
adds $4,340 (in interest) to
the cost of the car.
Always think long term. If a longer finance cycle
means that you'll also be keeping the car during the period when
you can also expect more expensive repairs or service visits, or
past the point when it would have substantial trade-in value, then
that lower monthly payment may end up costing more than you bargained.
Real-life math
Being able to drive that dream car involves more than just making
the monthly payment. You want to make a smart decision on both the
car and the financing.
First, look at the basic costs. Just how much would the monthly payment differ if you financed your car over five or six years instead of two, three or four?
Dealers can typically offer from zero percent to 6
percent, depending on your credit and the length of the loan, says
Taylor. Typically, the longer the loan, the higher the rate.
"Obviously, if you're going to pay it off over a longer period of time, it will cost you more," says Deanna Sclar, author of "Buying a Car for Dummies." So look at what those dollars could have earned you elsewhere. If you hadn't put the money into the car, and instead parked it in your investment or savings account, what would that have earned?
"You have to look at what your money can buy you," Sclar says.
The smart rule of thumb? Spend no more than 20 percent
of household income on auto payments, says Reed. By that measure,
most people really can't afford the cars they're driving, he says.
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