Things are always changing in the loan and finance market in keeping with the global economy. Now auto dealers are busy promoting loans of up to 84 months in order to be able to offer lower monthly payments and to try and get buyers to splurge on high-end models.
If you are thinking about buying a new car or truck, here's a good rule of thumb for you: If you can't afford to pay it off in 60 months or less, don’t buy it. If you don’t listen to this advice you will regret stretching your payments further. You will land up making repayments forever.
Look what happens:
Longer loans have higher interest rates, meaning that you will pay a higher rate over a longer period.
Here’s an example:
A Cadillac CTS at $34,000 in a 60-month loan at 7% interest will cost you $673 a month. The total amount of interest is $6,400.
On an 84 month loan, now at 9.7% interest, the Caddie will cost you $560 a month. Remember longer loan = higher interest rate. The total amount of interest is $13,000. You will pay double the interest on the 60 month loan and there is no benefit to you as this interest is not tax deductible.
You will be tired of the car before the loan is repaid anyway.
The dealer is simply using the long-term loans and lower payments as a lure to get you to buy luxury cars and SUV’s that cost $30,000 or more.
Then there’s depreciation. On an extra-long loan you will be reducing your debt slowly, while your new car or truck will depreciate at the normal rate, losing 20% to 30% of its value in the first year alone.
Look what will happen in this example: On an 84-month loan on a Toyota Highlander at $28,225 and a 9.7% interest rate, you will still owe about $18,400 after three years. A dealer will give you $15,000 on a trade-in, if the vehicle is in good condition.
On an extra long loan you could still be paying for your car after you get rid of it!
Remember that the economy is slowing down and this is not a good time to take on more debt, especially if you don’t have to. Anything can happen in the near future, layoffs, pay cuts, etc. Be careful and spend wisely.