By Jim Donovan
PHILADELPHIA (CBS) — The economy is still chugging along and consumers are paying off debt. All good things, right?
But as 3 On Your Side Consumer Reporter Jim Donovan finds, for some still struggling to make ends meet, longer term loans, particularly on new cars, are gaining traction.
Veronica Viveros is in the market for a new car but will soon have new demands on her monthly budget that is forcing her to shop for a longer-term loan. She says, “I am expecting and we do have a lot of bills and finances. So I’m looking at about $300 to about $350 a month. That would help out so much.”
If she’s in the market for a $23,000 car loan and wants to keep her payments to $350 a month, she will have to look at a 72-month loan. That means her new baby will be six years old and going into first grade by the time she pays that car off.
Alec Gutierrez, Senior Analyst for Kelley Blue Book, says, “The consumer that’s opting for a $25,000 new car loan can save around $200 per month by opting for a 72-month loan, as opposed to a 48-month loan.”
A $350 monthly car payment can be enticing for many people, but it also could be very risky. According to Gutierrez, “The longer you extend your term, the longer it’s going to take you to get out of a negative-equity position. So, consumers that take a longer term find themselves at greater risk of being under water for a longer period of time.”
And that doesn’t take into account what could happen over all those years. A car accident or a blown engine can devalue the car, putting consumers with long-term loans into a bigger financial bind.
That said, more and more people are sticking with the same set of wheels further down the road. Auto dealer Steve Foresta says, “The trend in the last 10 years is people have kept their cars longer. The cars have been built better.”
And experts point out not all long-term loans are bad. Gutierrez says, “A general rule of thumb is that consumers should try and keep their monthly payments within 20% of their gross income. So, if that means you have to opt for a five- or six-year loan, that generally makes sense.”
Be aware, interest rates on loans that go 72 months and beyond will be higher than traditional loan periods, and most experts do not recommend 96-month loans, which are also now available.