Time magazine recently published an article warning consumers about the pitfalls of the new 8-year auto loan. Although it may seem that the more affordable, lower monthly payments outweigh any risk associated with the longer-term loan, there are several factors to consider. First, how long do you plan to keep your new car? If you typically purchase a new car every 6 years, then taking out an 8-year loan is not a good idea because you would still owe on the car when looking for a replacement.
Second, how much will the car be worth in 5 or 6 years? Car values depreciate every year and you do not want to wind up owing more than what the car is worth. Third, how much can you afford to pay monthly? If you can afford the monthly payment of a 5 year loan, then you should opt for the shorter term loan. In the end, this option could save you thousands of dollars in interest.
Additionally, prepare before shopping for a car. Know how much you are willing to spend, what monthly payment you can afford, and what type of loan you are willing to consider before visiting any dealerships. Research what type of car best fits your needs and budget. Is a new or previously owned car the best option? If buying a used car, be sure to check the history of the vehicle. Is it better for you to buy or lease?
Finally, don’t be afraid to negotiate. Dealers often expect to negotiate with consumers.
-Kathryn M.
Sage Personal Finance 