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Can You Afford a 6 Year New Car Loan?

2014 Range Rover2014 Range Rover

Last month J.D. Power reported that a record 33.1 percent of new vehicles are now being purchased with long-term loans of six years or longer. The primary reason behind this seems to be rising car prices. According to Kelley Blue Book the average priced car now comes in at $32,086. Of course more affordable cars are available and buying used brings the price down considerably. Most financial advisors recommend keeping overall debt payments including rent or mortgage to less than 36% of your income so spending more than 10% on your auto loan might not be the best idea.  

Long-term loans bring down the monthly payments but many times the extended term brings a higher interest rate with it. Even with a low rate paying interest for longer means paying more total interest raising the overall cost of ownership.  Autos depreciate rapidly so with a long term loan you could easily end up “under-water” quickly and wind up owing more than the car is worth when you want to trade it in.  Most warranties will also expire before the loan is repaid and any major repairs could be a financial headache when you also have a monthly payment and a large loan balance. 

To get the most out of a car loan try to watch for zero percent financing specials and cash back offers. Calculators like this one can help you determine which is a better deal based on the new car loans and incentives available for any given vehicle. Making a down payment of 20% or more will also help to reduce your risk of owing more than the car is worth within the first few years.

Unless you are able to pick up a long-term loan with financing close to zero percent you should seriously consider trying to stick to no more than four year terms and keep within the 10 percent of income guideline, which should include taxes and insurance. This could mean settling for a less expensive car than you hoped for or considering certified pre-owned cars if you are like most people in the U.S. If you are ready to shop for a new car AutoBuying101.com can help you get dealer price quotes for the best deal on a brand new automobile.