You’ll get no lectures from me on buying new cars instead of used ones or for financing the purchase instead of paying cash. I have owned cars since I was 16 and have bought them every which way – new, used, with cash and via loans and leases.
One rule I have is that a car loan should never be financed for longer than five years. My strategy for new cars is this: Finance over five years, but pay off the loan in two or three years. The latest data on car payments from J.D. Power suggests I’m out of sync with what the majority of car buyers are doing. Last month, 56 per cent of people financing a vehicle chose a term of 84 months or longer.
I asked members of my Facebook personal finance community what they thought about this trend and the consensus is that it’s problematic. Here are some of the points people raised about long-term car loans:
- You’ll still be paying for your car long after the warranty period is over
- You could end up owing more than the car is actually worth; one person said the value fell below his vehicle’s remaining loan balance in year four of the loan
- Allows dealers to sell you a more expensive car than you could afford over a shorter term
One benefit of financing over five years, max, is that you’ll end your loan payments quicker and be able to redirect your monthly payments to savings. Seven years is a long time to send monthly payments of hundreds of dollars to your car company’s financing division.