Don t let a long car loan drive you into a ditch – CBS News

Don’t let a long car loan drive you into a ditch

Americans are spreading out their car loans more and more. In June, the average loan length hit an all-time record of five years, nine months for fresh cars and five years, seven months for used cars, according to Edmunds.com. Some consumers are taking loans for up to seven years.

The lure of spreading out a loan is a lower monthly payment on a vehicle — especially an SUVs or truck — that’s increasingly expensive. But individual finance experts caution that if you opt for too long of a car loan, you could be venturing debt troubles.

Indeed, problems are demonstrating up in the default rate. Credit reporting stiff Experian said loan delinquencies (payments sixty days late) are continuing to increase, hitting 1.7 percent of finance company loans and 0.7 percent of all auto loans.

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Even buyers who keep up the payments and want to trade in their cars again may find themselves “upside down” — with the used car that’s worth less than the payoff amount on the loan. This problem has worsened as used-car values have declined from oversupply as more cars come on the market as leases end.

The temptation then is to roll the old loan into a fresh one for a fresh car. “Not only do buyers not have a down payment, they’re adding the balance from their old loan,” said Greg McBride, chief financial analyst at Bankrate. “It can be an endless cycle.”

Here are some tips to help you avoid the pitfalls in these longer auto loans:

Make as large a down payment as you can. Putting cash up front reduces the principal and the payments of the loan — a much better option than spreading it out. For used cars, put up at least twenty percent if you can, advises McBride. The same amount is ideal for fresh cars, but if you can’t afford that, be sure to put at least ten percent down.

Don’t take a loan longer than five years. Having a time limit helps you control your total spending. The longer the loan, the more you pay. “Going beyond five years is a big crimson flag,” says McBride.

Limit your auto expenses to twenty percent of your income. Make sure that all auto expenses, including fuel and maintenance, don’t exceed twenty percent of your gross income, counsels Edmunds.com. Recall with a newer car, your auto insurance payments will rise. Before embarking to shop, work out a budget using a device such as Edmunds’ affordability calculator.

In attempting to limit your annual auto expenses, don’t spread out your car payments too much. If payments are too high to treat on a loan of five years or less, consider a car that’s not as costly.

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