Orlando, Fla. – 9/26/2006
That shiny new vehicle on the dealer’s lot can be enticing, but with interest rates creeping up many would-be buyers turn to the only other way they know to get into a new car: extend the length of the loan, thereby lowering the monthly payment.
Long-term loans are gaining traction with consumers hit hard by rising interest rates and gas prices, according to AAA. More than half of new-car loans were for five to seven years in 2005, up from 22 percent in 2000.
These loans can have a big impact on cash flow. Monthly payments go down as the loan term extends into more months or years, and $50 a month can make a huge difference to someone on a tight budget. But, although the monthly outlay is lower, you’ll pay much more interest over the life of the loan.
“Consumer debt is at an all-time high,” said Bill Gerhard, director, AAA Financial Services. “For many buyers, the only way to make a car affordable is by extending the term of the loan, but that causes a host of other problems.”
Chief among those problems is being upside-down on a car loan. A long-term loan delays ownership even as the car is losing its value, which drops off steeply after the vehicle is five years old. Those who opt for long-term financing are paying a greater amount of interest each month, increasing the likelihood that the loan payoff will be higher than the trade-in value.
“Being able to drive your dream car involves more than just making the monthly payment,” says Gerhard. “You want to make the best decision on both the car and the financing.”
AAA offers these tips on making sure you get the right car and the right loan.
Consider how you will use the car and for how long. AAA recommends setting the loan term to coincide with the length of time you plan to own the vehicle.
The longer you keep a car, the more likely you will have to pay for additional repairs. Add in the cost of repairs to the monthly payment to get a more accurate picture of what the vehicle will cost.
Try to put down at least 20 percent to cover the first year of steep depreciation and that should keep you from ever being upside down on the vehicle.
Be realistic about how often you trade in or buy a different vehicle. You may love the car when you first get it, but how will you feel about it when it is three years old and you’re only half way through the payment booklet?
As North America’s largest motoring and leisure travel organization, AAA provides more than 49 million members with travel, insurance, financial and automotive-related services. Since its founding in 1902, the not-for-profit, fully tax-paying AAA has been a leader and advocate for the safety and security of all travelers. AAA clubs can be visited on the Internet at www.AAA.com.