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US buyers taking longer vehicle loans

Published:Sunday | July 5, 2015 | 7:00 AM

Kevin Flores has more than six years to pay off the loan on his new Nissan Frontier pick-up.

That's more than double the length of the truck's bumper-to-bumper warranty. And it means the Baton Rouge, Louisiana, resident will be paying roughly US$2,580 in interest over the life of the roughly US$25,000 loan.

He accepted the extra costs that come with stretching out his loan-payment term in order to make his monthly payments affordable. "The way I justified it is, in five or six years when I'm making more money, I can make extra payments toward that and pay it off sooner," said Flores, a buyer at an engineering company.

Car buyers are increasingly taking on loans with lengthier payoff terms to cope with rising prices or to make SUVs, crossovers, and other pricier models more affordable. About 30 per cent of all new vehicles financed in the first three months of the year were purchased with loans ranging from just over six to seven years, according to Experian Automotive.

In the first quarter of this year, 16 per cent of used-car purchases were financed with these longer-term loans.

Low interest rates, longer manufacturer warranties, and the increased durability of newer cars can help blunt the potential risks of a loan that may not be paid off for six or seven years. People are hanging on to their cars for longer periods, with the average length of ownership at about eight years, said Melinda Zabritski, Experian's senior director of automotive finance.

Even so, these loans also translate into higher interest payments over the life of the loan and can saddle buyers with other costs.

"When you agree to finance for that period of time, it makes a car seem more affordable than it otherwise might be," said Philip Reed, senior consumer advice editor at Edmunds.com.

Here's what to consider if you're contemplating taking an auto loan with a term of more than five years:

Overall costs

The prospect of spreading out the expense of a vehicle may be enticing, but don't lose sight of the total cost. It's no accident that dealerships often will try to focus buyers on the monthly payment and not the sticker price and interest costs.

One strategy: Arrive at the dealership with pre-approved financing in hand and say you want to negotiate the price of the car and leave any financing discussions until later. Once you arrive at an agreeable price, compare your pre-approved financing to the dealership's offer.

Remember also that unlike a mortgage, the interest paid on a car loan is not tax deductible.

Length of ownership

How long are you planning to keep the car - long after your six- or seven-year loan term ends? Financially speaking, that could be the best move as you can benefit from the savings of not having to make a car payment for a few years after you've paid it off.

But you also may have to contend with greater repair costs and the fact that the car will have lost most of its resale or trade-in value. Note that these factors will be more of a concern on a used car.

"Buying a used car is a good financial decision for a lot of people, but I wouldn't finance it for six or seven years," Reed said. "Let's say it's a three year-old car. Now all of a sudden you're making payments on a 10-year-old car."