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Car loans keep getting longer (Page 1 of 3)
2006: A look back - A look ahead  
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Car loans keep getting longer

Next, look at how you want to use the car and for how long. Many experts recommend setting the loan term to coincide with when you probably want to trade the vehicle (and even giving yourself a few payment-free months to assemble a down payment.) If you typically like to trade a car every three or four years, how would a five- or six-year loan change your plans?

"Certainly a longer loan does make it more difficult to trade early," says Myers.

How will having an older car impact your next trade-in deal? Typically, a well-maintained 6-year-old model will fetch considerably less than a 3-year-old version of the same vehicle.

Another point to keep in mind: Sometimes predicting the future worth of an auto can be a gamble. Future value is based on predicted demand, and what is in demand can change very quickly. "You can't always figure that out," says Reed.

Case in point: sport utility vehicles. While they may seem to make up every other vehicle on the road, demand for SUVs has dropped since the price of gas started creeping toward and past $3 a gallon, says Reed. As a result, the trade-in and resale value once predicted for many models several years ago has changed, he says.

What will it cost you?
You also want to look at the repair costs that you'll rack up during those extra years. Based on what you know about the make and model, what kind of repair bills should you expect during the additional years you'll have the car? Can you afford those bills in addition to the monthly payments?

One good thing: Warranties on cars have gotten longer, too, says Myers.

Check out any service contract or extended warranty the seller might offer to see if it would cover or offset any of the garage bills you could expect during those extra few years of ownership.

Then just do the math. When you figure out how much extra you stand to pay in interest, try to also tally up if or how the value of the car would change if you keep it a few more years. If you plan on using the car as a trade-in, what will those extra few years cost you when you go to buy your next car? And what, if anything, would you be earning with any of that extra money you might be paying?

From a more practical standpoint, what choices do you have if your life changes (moves, marriage, career change, baby or new commute, etc.), and the old car is no longer the right car?

Try to keep your options open. If you put at least 20 percent down, you've covered that first year of steep depreciation and should never be upside down in your loan and owe more than the car is actually worth, says Reed (which can make it difficult to sell or trade the vehicle). In some situations, you may even want to consider refinancing, he says.

Don't forget to add in the boredom factor. Sure, you love the car now, but how will you feel about it when it's three years old and you're only halfway through the payment book?

Most of all, realize that this vehicle is one of many that you will own and it's something that will affect your finances for the period of time you own it, so plan accordingly.

Says Reed, "It's a good idea for people to look at auto expenses as a cycle and not a one-time shot."

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: Nov. 1, 2006
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