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Long-term car loans popular but pricey in long run

McClatchy-Tribune Information Services

February 9, 2015


DETROIT — Martez Hinton has his eye on buying a black 2015 Dodge Charger around September, if things work out.

Hinton, 28, who works on an assembly line building Dodge Ram trucks, hopes that contract talks between the United Automobile Workers and Fiat Chrysler Automobiles go smoothly and a strike is avoided. Hinton, who was hired in 2013 with lower wages under the two-tier system, would like to see raises, too.

He’s building his savings and aiming to make a down payment of $10,000 or more for a $33,000 Charger. He doesn’t want to take out a car loan any longer than 60 months.

"The longer you have a loan out, the more you end up paying back," said Hinton. "I really don’t like car loans."

Looking to get your finances back on the road in 2015? The savvy money says it’s wise to turn away from a trend toward dragging out car loans for 72 months or 84 months.

About 40.3 percent of new car loans ranged from 61 months to 72 months in October and November, according to Melinda Zabritski, senior director of auto finance for Experian.

And 25.7 percent of new car loans ranged from 73 months to 84 months based on preliminary fourth quarter data.

Much of the growth has been in the 73-month to 84-month range, which had been just under 10 percent during the recession and slightly above that during better days, according to Experian.

By contrast, about 25.1 percent of new car loans ranged in length from 49 months to 60 months during that time frame. As for shorter-term new car loans, about 3.7 percent of the market was for 25-month to 36-month car loans, according to Experian.

The average new-car loan was for 66 months, according to Experian.

Auto experts predict the trend toward more six-year and seven-year car loans will continue in 2015 and beyond, especially as prices go up for SUVs, trucks and cars.

"It’s been steadily increasing," Zabritski said. "If we could all afford to finance vehicles for 36 months, that would be great. But you’re starting to look at a car payment like a mortgage payment."

Consider: A three-year, $28,000 new car loan at 4.5 percent would cost $832.91 a month. That payment drops by nearly half to $444.47 a month on a six-year loan, according to a calculator at Bankrate.com.

Add up all interest payments and the overall cost of the car skyrockets with a longer-term loan. The total interest payments would be around $4,000 on that six-year new car loan with a rate of 4.5 percent — compared with nearly $2,000 on that three-year loan.

More likely, the interest rate a consumer would get on a longer-term car loan would be higher than a shorter-term rate, as well, driving up overall costs. That’s because there is an elevated risk of default the longer the loan term, according to Greg McBride, chief financial analyst for Bankrate.com.

"Longer terms are always a temptation for consumers. So many people fixate on the monthly payment," said Phillip Reed, senior consumer advice editor for Edmunds.com.

But the longer you take out a car loan, the more chances you’re taking with your finances.

"It brings a lot of unnecessary risk into the equation," said Alec Gutierrez, a senior market analyst for Kelley Blue Book.

While cars last longer than they used to, there’s normal wear and tear on a car the older it gets. New tires, brakes, and some significant maintenance are in the cards the longer you own a car or truck.

Mike Bangs, 45, is leasing his Ford F-150 now but said he typically wouldn’t want to go longer than 60 months on a car loan.

"It’s out of warranty before you ever get done paying it off," said Bangs.

To be sure, consumers who opt for a longer-term car loan enjoy smaller monthly payments and may be able to drive away with a more elegantly designed vehicle with new technology.

But will that long-term loan only saddle you with more debt and let you buy more car than you really can reasonably afford right now? Would buying a used car or a lower-priced new make or model be less hazardous for your finances?

What if you need to sell the car if you lose a job or have another financial emergency? What if you just don’t like the car after two or three years of driving it?

The longer the car loan, the longer it takes to build equity in the car.

If you have no equity, you cannot sell the car and pay off the car loan with the proceeds. Buyers pay what they think the car is worth at the time; not what you owe on the vehicle. You’d be on the hook for the rest of the loan.

Some consumers could find themselves in a never-ending cycle of car loans, if they extend them out too long.

For those reasons, some drivers and car experts do not recommend going more than four years or five years on a new car loan.

"It just burdens you down, unless you’ve got payments of $120," said James Griffin, 31.

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MORE ON CAR LOANS

—The average rate on car loans is 4.07 percent but many car loan rates are being offered at 3 percent or lower at banks and credit unions, according to Bankrate.com.

—Do not co-sign for an auto loan. While friends or relatives might want you to co-sign for the loan to get a lower interest rate, you’d have to pay off the entire loan when the person who signs for it defaults, warns Bankrate.com.

—It’s better to research your credit score and calculate the size of the loan that you could afford before shopping for a car. Various web sites including Bankrate.com and Cars.com offer auto loan calculators online for research.

—Shop around for a car loan rate, ideally before you shop for a car. Some experts say there can be wide differences on rates offered to the same consumer from various lenders.