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Your Money: The pros and cons of longer-term car loans

If you need seven years to pay off

If you need seven years to pay off a car loan, you might want to consider buying a cheaper car, some experts say. Credit: picture-all/Klaus OhlenschlÃger

In the first quarter of 2019, nearly two-thirds of new car loans had terms longer than five years. Seven-year loans are in vogue. Is this a good thing?

“I am not a big fan of 7-year auto loans," says Christopher Congema, an investment advisor with Landmark Wealth Management in Melville. "While the monthly payment is lower, the reality is, if somebody needs to go out seven years to afford the car payment, perhaps they are better off looking for a lower-priced car,”

As with all financial decisions, it's best to take a hard look at the pluses and minuses.

The pros

You can take advantage of a lower car payment. “If you’re disciplined to take the extra savings from a lower payment and apply it toward higher-cost debt like credit cards, that reduces overall interest costs,” says Congema.

The cons

Extended-term loans can end up costing you thousands of dollars in higher interest costs over the term of the loan.

Richard Best, a writer for Dontpayfull.com, offers an example, “A $25,000 car financed at 4% over a 48-month term costs $564 in monthly payments, with total interest costs of $27,100. The same $25,000 car financed over 84 months would cost $342, but the total interest costs would be $28,700.”

Owing more in interest isn’t the only problem, says Sonia Steinway, co-founder of OutsideFinancial.com, a provider of car financing in La Jolla, California.  “You’ll also risk having negative equity for a much longer time. Negative equity is when you owe more to the lender than the car is worth. It can make it harder to sell your car or refinance your car loan if you find a better rate.”

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