Car Payments and Avoiding Long-Term Auto Loans

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It is easy to get caught up in the phenomenon of the new car smell. You saw a car that looked great to you, your old car is tired and you are tired of it. You go to a dealership, take that test drive, and the love affair begins. You are blinded by your favorite color, the great stereo, all the safety features, and the fuel economy. Youíll do whatever it takes to drive home in your dream car. Does that mean youíll sign a 7-year legal, binding contract so you can afford the payments? If so, you are not alone-but remember that misery loves company.

2019 Q1 Average Monthly Car Payments and Loan Terms

The latest Experian finance report tells us that car payments continue to rise as people choose larger and costlier vehicles like SUVs. New car monthly payments in the 1st quarter of 2019 averaged $554/month, taking into account all credit levels. (That's up from $547 in the Q4 2018). Used car payments averaged $391/month.

To lower monthly payments, people continue to take out longer loans. In the 1st quarter of 2019, 32 percent of people who bought a new car financed it for 73 to 84 months and 38 percent financed 61 to 72 months. The majority of people buying used cars (42.1%) financed it 61-72 months while 20 percent financed 73-84 months, up from the 4th quarter of 2018.

60-Month Loan Cutoff

Going more than 60 months should be approached with extreme caution. Based on your annual mileage, will the car even last 7 years? Are you willing to drive this car for at least 66 months before trading it, because odds are, youíll have to? Did you take the time to calculate how much extra interest youíll pay? You can bet that the longer the loan, the higher the interest rate. What if something catastrophic happens, like loss of job, or health issues and you need to get out of the loan? It is very difficult to get out of a long-term loan unless you had a hefty down payment at the time you purchased.

This is where restraint comes in. If you canít get the car you want in 60 months, you should consider not buying the car. I understand that at the point you find out you canít afford it, you are already in love with it, so planning in advance is critical. There are a ton of car payment calculators online, so figure your budget and find out how much money you can finance on 60 months to get to the payment you can afford, and stick to it.

Consider Leasing

If you just have to have the car you love, and you donít drive over 15,000 miles a year, look at a 36- or 39-month lease, they are much easier to get out of if you have to. Leasing payments in 2019 Q1 averaged $436/month when taking into account all credit types.

Your Down Payment

Also, if possible, postpone the decision until you can save enough down payment to afford the car on a 5-year contract. Perhaps you can do without some of the options on the car you like, and lastly, maybe there is a two-year-old, low mileage pre-owned car out there that you would be happy with.

Bottom Line

If you buy a car today on an 84-month term, it will be almost the year 2026 until you have it paid off. Does that really sound like a good idea? Make a smart car buying decision by using restraint and by using good common sense.

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