Even if that shiny new car is calling your name, you might want to pump the brakes on purchasing it. Long auto loans might reduce the monthly payment, but it will end up costing you more in the end. Just as you put thoughtful consideration into choosing auto insurance, you also need to evaluate all the aspects of loans.
An Experian article cited by CNBC News states that car buyers are taking six-and-a-half to seven years to pay off car loans, which is a 23.7 percent jump from the quarter before it. While this may mean that they can now afford a more expensive car, it will take longer for those owners to reach positive equity on their vehicles.
Longer loans mean more interest charges. Not only do you accrue more interest from making loan payments over a long period of time, but longer loans tend to have higher interest rates as well. Plus, the longer you have the vehicle, the less valuable it becomes. According to edmunds.com, a car's value decreases 11 percent as soon as it is driven off the dealership's lot. Fast-forward five years, and the car is only worth 37 percent of its original cost. You'll typically only be paid the vehicle's worth from your insurance company in the case of its getting totaled. Because of the depreciation, that might mean you'll get less than what you still owe on the car. No one wants to be stuck paying for something they can't even drive. So even if the car dealer's financing tempts you, remember to stop and think about how much you will really be paying in the end.
What to do
Consumer Reports suggest buying cars with loans no longer than 48 months. This might mean higher monthly payments, so make sure your purchase fits within your budget. It's important to have a solid understanding of your finances before walking into the dealership. Additionally, get loan approval before you shop, as this will help you find the right interest rates.
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