WASHINGTON (11/18/14)--A longer-term loan can make even the most expensive car look affordable.
By stretching out the loan over many years, your monthly payment is likely lower, but you could end up paying a lot more in interest. Still, many people find such loans attractive.
The average new car loan is now 67 months, according to Edmunds.com
--the second-highest average term on record (Washington Post
Nov. 12). Almost 25% of vehicle loans made in the second quarter of 2014 were for 73 to 84 months, according to Experian.
That's well above the standard three- to four-year loan that used to be typical for new car purchases. Here are some of the problems with taking out a longer car loan:
The longer the term of the loan, the worse your interest is likely to be. Shorter-term loans generally qualify shoppers for a better rate;
There's a greater chance you'll end up underwater. Without a substantial down payment, if you total the car or need to sell it, you could up receiving less than you owe on the loan; and
You're stuck with the car even if you don't want it anymore. If you want to buy a different vehicle, you likely won't be able to trade in your car because of the difference between what you owe and what the dealer is willing to pay for it.
If you need a longer car loan just so you can afford to buy the car, that's probably a good sign that you can't afford the car in the first place. Keep your loan at 48 months, and visit your credit union for preapproval on a loan before you even begin shopping.
That way you know exactly how much you can afford, and you can avoid taking out a loan that's going to be a financial burden long after the new car smell has evaporated.
If you have an auto loan from another financial institution, your credit union can help you refinance to a shorter term but still help you stay with an affordable payment.
For related information, read "Keep Your Old Car Running Longer" in the Home & Family Finance Resource Center.