Options for long-term car loans

Experts explain the pros and cons of different length loans


The economy is still chugging along and consumers are paying off debt.  But for some still struggling to make ends meet, longer term loans, particularly on new cars, are gaining traction.

Veronica Viveros is in the market for a new car, but will soon have new demands on her monthly budget that force her to shop for a longer-term loan.

 "I am expecting and we do have a lot of bills and finances. So, I'm looking at about $300 to about $350 a month. That would help out so much," she said.

If Viveros is in the market for a $23,000 car loan and wants to keep her payments to $350 a month, she will have to look at a 72-month loan.    That means her new baby will be six years old and going into first grade by the time she pays that car off.

 "The consumer that's opting for a $25,000 new car loan can save around $200 per month by opting for a 72-month loan as opposed to a 48-month loan," explained Alec Gutierrez, senior analyst for Kelley Blue Book.

A $350 monthly car payment can be enticing for many people, but it also could be very risky.

 "The longer you extend your term, the longer it's going to take you to get out of a negative-equity position. So, consumers that take a longer term find themselves at greater risk of being under water for a longer period of time," said Gutierrez.

And that doesn't take into account what could happen over all those years. A car accident or a blown engine can devalue the car, putting consumers with long-term loans into a bigger financial bind.  With that said, more and more people are sticking with the same set of wheels further down the road.

 "The trend in the last 10 years is people have kept their cars longer.  The cars have been built better," said Steve Foresta, General Manager at O'Hare Auto Group.

And experts point out not all long-term loans are bad.

 "A general rule of thumb is that consumers should try and keep their monthly payments within 20% of their gross income. So, if that means you have to opt for a five- or six-year loan, that generally makes sense," said Gutierrez.

But most experts do not recommend 96-month loans, which are also now available.  Whatever you decide to do, figure out what you can comfortably afford to pay for a new car before you go to the dealer.

Viveros is leaning towards a six-year car loan. That way her car expenses can take a back seat to the money she needs for her growing family.

"It would work out great for me," she said.

Remember that interest rates on loans that go 72 months and beyond will be higher than traditional loan periods.  Shop around before you hit the car dealer by comparing costs at sites like bankrate.com, kbb.com or edmunds.com.