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Don't Get Run Over With A Long New Car Loan
By EchoBay Loans Staff Writer

When you fill out your bank auto loan application, you'll notice there are a number of loan terms that you can choose from. Most companies will offer 12, 24, 36, 48, 60, and 72-month financing options. Some companies are even offering up to 8 years of financing on new car loans. The longer the loan term, the lower the monthly payment will be.

The idea of a lower monthly car payment has enticed many a car buyer into opting for the long-term 60 to 72-month new auto loans. Unfortunately, most of these buyers eventually realize what a mistake it was to finance their vehicles over such a long period of time. It initially sounds great, doesn't it?
You get to buy a nice, new car and you only have to spend a few hundred dollars each month for the privilege to drive such a fine vehicle. In reality, there are more cons than there are pros to this type of car financing.

The first issue that car buyers run into is the issue of depreciation and reverse equity. Next to a house, a car or a truck is one of the largest purchases that consumers will make. Unlike your home, your car does not appreciate in value, it depreciates. What that means is that the minute you drive your new car off the lot, the car is worth less than the original purchase price (unless you got an unbeatable deal) and you're losing money. The older your car becomes and the more you drive it, the lower its value dips.

When you take out a long-term new car loan, while your car's value is depreciating, the payoff balance remains pretty much the same for the first year or two. This is because during the first year or so of your new auto loan, the majority of your payment is being applied to interest. This means that out of the amount you are paying, only a very small fraction of that payment is being applied to the principal of the loan.

Even if you're spendthrift with your finances, and you don't mind paying mostly interest during the beginning of the new loan term, you will soon regret that decision if you decide to sell the vehicle before the loan is paid off. If you take out a long-term car loan, you should plan on keeping the car till that loan term is over. That's not likely to happen, considering most car buyers will sell their vehicles within three or four years.

Many car buyers who opt for long-term new car loans experience a frustrating surprise when they decide that they want to sell their vehicles and there is still more than a year or two left to pay off the loan. These consumers become quickly familiar with the term "upside down" in relation to car loans. This means that you owe more on the car than what the car is worth.

For instance, say you purchased a brand new car or truck for about $28,000. You may decide to sell the vehicle when you still owe $15,000 on it, but by that time the actual market value may only be $11,000. That means that if you really want to get rid of that vehicle, you're going to have to fork over the difference between what you can sell it for and what you owe on it, just to get it off your hands.

Another factor to consider is that long-term new car loans tend to have a higher interest rate than shorter term loans. Even if it's just one percent, the difference that amount ads up to over a period of time can be quite substantial. For example, if your purchase price is $20,000, and you finance the vehicle for 60 months at 6 percent interest, your car payment will be about $386. The total amount you will pay over the life of the loan will be about $23,160.

If you purchase that same car for the same amount, but finance it for 36 months and only pay 5 percent interest because of the lower interest rates for short-term loans, your monthly payment will be about $599 and your total payments will equal approximately $21,564. That's a difference of over $1500.

While the monthly payments of long-term new car loans may seem more attractive then the short-term monthly payment requirements, it's important to remember the not-so-obvious expenses that you're going to occur later down the line. If you do decide to keep the car till the loan is paid off, you need to remember that as a car gets older, more things can go wrong with it. The warranty on your car is not likely to last the duration of your car loan, and the during the later part of your loan you may be facing costly repairs in addition to the monthly car payments. This is why so many consumers face repossession or will voluntarily surrender their car if something goes seriously wrong with it while they are still making payments on it.

The best thing to do is take out a short-term new car loan. It may mean getting a less expensive car, but you won't be faced with expenses or financial losses that you aren't prepared for. You may even want to try to purchase your car when the manufacturer is offering an interest-free loan, and be sure to pay off the loan as fast as you can. The goal is to be driving debt-free in the shortest time possible.

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