Are Long Term Car Loans Worth It? 7/15/13
CBS 7 News
July 15, 2013
Veronica Viveros is in the market for a new car, but will soon have new demands on her monthly budget that force her to shop for a longer-term loan.
"I am expecting and we do have a lot of bills and finances. So, I'm looking at about $300 to about $350 a month,” said Veronica Viveros, who is shopping for a new car. “That would help out so much."
If she's in the market for a $23,000 car loan and wants to keep her payments to $350 a month, she will have to look at a 72-month loan. That means her new baby will be six years old and going into first grade by the time she pays that car off.
"The consumer that's opting for a $25,000 new car loan can save around $200 per month by opting for a 72-month loan as opposed to a 48-month loan,” said Alec Gutierrez, Senior Analyst for Kelley Blue Book.
A $350 monthly car payment can be enticing for many people, but it also could be very risky.
"The longer you extend your term, the longer it's going to take you to get out of a negative-equity position,” said Gutierrez.” So, consumers that take a longer term find themselves at greater risk of being under water for a longer period of time.”
And that doesn't take into account what could happen over all those years. A car accident or a blown engine can devalue the car, putting consumers with long-term loans into a bigger financial bind. That said, more and more people are sticking with the same set of wheels further down the road.
"The trend in the last 10 years is people have kept their cars longer,” said Steve Foresta, General Manager at O’Hare Auto Group. “The cars have been built better."
And experts point out not all long-term loans are bad.
"A general rule of thumb is that consumers should try and keep their monthly payments within 20% of their gross income,” said Gutierrez. “So, if that means you have to opt for a five- or six-year loan, that generally makes sense."
But most experts do not recommend 96-month loans, which are also now available. Whatever you decide to do, figure out what you can comfortably afford to pay for a new car before you go to the dealer. Veronica is leaning towards a six-year car loan. That way her car expenses can take a back seat to the money she needs for her growing family.
"It would work out great for me,” Viveros said.