September 27, 2006
Auto buyers should plan ahead for right vehicle and best loan, AAA says
Orlando, Florida – Long-term loans are gaining traction with consumers hit hard by rising interest rates and gas prices, says the American Automobile Association (AAA). More than half of new-car loans in 2005 in the U.S. were for from five to seven years, up from 22 per cent in 2000.
These loans can have an effect on cash flow, as monthly payments go down as the loan term extends, but consumers will pay much more interest over the life of the loan.
“Consumer debt is at an all-time high,” says Bill Gerhard, Director of AAA Financial Services. “For many buyers, the only way to make a car affordable is by extending the term of the loan, but that causes a host of other problems.”
Chief among the problems is being “upside-down” on a car loan, where the amount remaining on the loan is larger than the trade-in value of the vehicle.
AAA suggests the following tips:
- Consider how long you will own the car; set the loan terms to coincide with the length of time you plan to own the vehicle.
- The longer you keep a car, the more likely you will have to pay for additional repairs. Add in the cost of repairs to the monthly payment to get a more accurate picture of what the vehicle will cost.
- Try to put down at least 20 per cent, to cover the first year of steep depreciation. This should prevent being “upside down” on a vehicle.