Buying a new car is one of the biggest purchases many people
ever make. But even for such a high-priced item, you should steer
clear of what's becoming an increasingly popular way that many
car buyers are financing their vehicles.
The scary trend in auto financing
Strapped for cash, more car buyers are taking on long-term loans
to buy new vehicles. As a report in
Wall Street Journal
discussed earlier this month, the average term for car loans late
last year rose to a record-high 65 months. The proportion of
loans ranging from six to seven years in length has grown by more
than 50% since 2008, and some lenders are even offering 97-month
car loans -- forcing you to make car payments for more than
Ford Focus. Photo source: Ford Motor Company.
car buyers are taking on such long loans
is pretty clear: Longer loans mean lower payments. With auto
prices on the rise and even used-car prices remaining strong,
buyers have little bargaining power in hoping for discounts and
instead have to look to spread their payments out over longer
periods of time.
3 reasons long loans are a bad move
Yet even with economic reality requiring many to consider longer
auto-loan terms, there are many good reasons to consider
alternatives. Even though you may have to put off buying a new
car long enough to save more toward down payments, you'll be in a
much better position to avoid these three pitfalls:
1. You'll be underwater on your car a lot longer.
As soon as you drive your car off the lot, its value drops below
what you owe on your loan. With short-term loans, your payments
quickly get you back to even, freeing you up to consider options
like selling it or trading it in for another vehicle down the
With long-term loans, though, it can take years for you to get
to the breakeven point. That means if you ever want to get rid of
the car, you'll have to pay extra money upfront just to pay off
your loan -- even after considering the trade-in value of your
vehicle. That's not a good situation for anyone to be in.
2. You won't get as many promotional financing deals.
Many auto dealers offer low-cost loans as an incentive to buy.
Over the years,
, and Chrysler all offered great financing deals to compete with
more popular Japanese models. With Detroit now having rebounded,
have also renewed incentives that include financing deals. Even
now, Ford offers 0% financing on some of its popular models,
including the Focus pictured above.
But Ford's offer goes only with loans of up to 60 months. If
you need longer-term financing, you may well end up paying a much
higher interest rate, and combined with having to pay interest
for a longer period of time, the result could be thousands of
dollars in wasted money as a result of your needing lower monthly
3. You'll strain your credit for other purchases.
Having an auto loan on the books may make it harder for you to
get credit for other purposes, such as buying a home or getting a
credit card. Even if you make payments on time, your monthly
payment will sap available income to support other loan payments.
That can leave you in the uncomfortable position of having your
car keep you out of the home of your dreams.
The smarter move
As tough as it is to defer gratification, waiting until you can
make a big down payment or settling for a less expensive vehicle
to qualify for affordable short-term financing is the better way
to buy a new car. Otherwise, you could end up
digging yourself into a debt hole
you'll have trouble ever getting out of.
For investors, Ford has come a long way, and the company still
has big growth opportunities ahead. We've outlined those
opportunities in detail, in the Fool's
premium Ford research service
. If you're looking for some freshly updated guidance to Ford's
prospects in coming years, you've come to the right place --
to get started now.
Fool contributor Dan Caplinger has no position in any stocks
mentioned. You can follow him on Twitter: @DanCaplinger. The
Motley Fool recommends Ford and General Motors. The Motley Fool
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