Should you get a 7-year car loan?
A growing number of car loans will take nearly two presidential terms to pay off.
This post comes from AnnaMaria Andriotis at partner site MarketWatch.
The typical duration of a new-car loan rose slightly, to 64 months, in the second quarter of 2012, according to data released Tuesday by Experian. That's up slightly from a year ago and the highest since 2008. But in many cases, borrowers are signing up for even longer loans.
The biggest area of growth in auto loans is among those with repayment periods of 73 to 84 months, which accounted for nearly 16% of all new-car financing in the second quarter. At seven years, these loans last nearly as long as the average marriage ending in divorce, according to the U.S. Census. (Post continues below.)
But is signing up for these extended repayment periods worth it for borrowers?
That depends, experts say. Traditionally, such long-term loans have cost 1 to 2 percentage points more than the shorter-term options. However, a growing number of car manufacturers have recently started offering lower rates, says Alec Gutierrez, senior market analyst of automotive insights at Kelley Blue Book. In some cases, rates of 0% to 2% are available on loans of up to six years, he says. Before the recession, it was rare to find six-year car loans with rates under 5%, he says.
These loans are also now easier to come by, says Keith Leggett, a vice president and senior economist at the American Bankers Association.
During the credit crunch, many lenders pulled back on offering loans that ran longer than five years, but as restrictions eased in this sector, the extended repayment has been brought back, says Melinda Zabritski, director of automotive credit at Experian.
But just because seven-year car loans are available doesn't mean borrowers should sign up for them, experts say. For borrowers, the main appeal of longer repayment periods is that they offer lower monthly payments. But these loans also come with risks, including thousands more in interest over the life of the loan -- even at low interest rates.
For instance, a borrower who signs up for a four-year car loan of $25,714 at 4.63% (the average rate and amount financed on new cars) would pay about $2,500 in interest over the life of the loan. But a borrower who finances this amount at the same rate over a seven-year period would pay about $4,440 in interest.
In addition, borrowers should consider how long they'll keep the car. Those who plan to sell in three or four years but sign up for a loan that runs a longer period could end up owing more on the car than it's worth when they try to unload it.
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I have six rules when thinking about buying a new car:
1. don't buy one unless you have done your homework, (IE) private financing, cost and type of vehicle and best pricing not pegged at what a car sticker indicates. That's what they hope to get and its always about twenty percent higher than a car is worth.
2. wait until the end of the year, then get a leased turnin with low miles at about half price of what it sold for new that same year.
3. Borrow money from a bank if you have too. Dealers tack about 2% on a new car just for handiling the credit.
4. When car is paid for, continue to pay into a special account and drive the car for at least 150,000 miles. Don't trade it in as you will be giving the dealer a big bonus just for trading.sell it private sale or give it to someone because that is what you do when you trade it in to a fast talking car salesman.
5. Put the money you have been paying each month into your 401K retirement account. It'll go a lot better when it's added to your regular retirement.
I've added 6000.00 every year since purchasing a ford cr. vic. in 2003
I still plan on driving 10,000 miles a year and its good for at least 200,000. If i keep it up, i should get at least 400,000.
6. Don't let a salesman try and sell you one you don;t need or can't afford just to make a nice commission.
good luck. Remember when you are in a dealers office, you are at their mercy.
One more thing...the way the Fed is creating money out of thin air I'm betting some pretty high inflation is on the way. If my wages even come close to keeping the pace with inflation then my car note is going to seem like nothing in a few years....
If you get a new car every three years and don't mind a payment, leasing is the way to go. More car for the money
At least that's the way I see it!!
I couldn't even read the article after reading the title.
All I can say is if you are crazy enough to finance a car for 7+ years.. well you know the saying.."You just can't fix stupid!"
Financing a car for any length of time is not that intelligent to begin with. Save your money, purchase a beater and keep saving for a better car. Trade up and always purchase with cash. You may make a few mistakes along the way while learning what to look for in a used car, however they will far out way the mistake of finance charges, new car depreciation, and high monthly payments
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