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Car loans keep getting longer

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.

-- Posted: Nov. 1, 2006
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