Don't stretch out that car loan
By: Staff

By sbup Staff

Ford (F) posted its biggest annual loss in 2008, and General Motors (GM) and Chrysler LLC are busy slashing jobs to deal with slumping demand. But before you step in and take advantage of these low prices, make sure you get a loan term that's right for you.

If you live in Pennsylvania, you can get a 4.64% interest rate on a 36-month car loan from Bank of America (BAC) to finance 90% of the car's purchase price. Buying a $20,000 car with a $2,000 down payment would result in a monthly payment of $537 and total interest costs of $1,317. If instead you chose Bank of America's 72-month loan with a rate of 5.14%, you'd pay only $291 a month, but a total of $2,956 in interest -- $1,639 more.

(For rates on loans in your area, head to's Auto Loan section and enter your ZIP code.)

Even if you manage to qualify for a deal with 0% financing -- such as the recent offer by GMAC (GKM) on certain 2008 models -- you still have to deal with the risks of depreciation. Cars typically lose 15% to 20% of their value per year, but even driving it off the dealer’s lot will drop the price by an extra 10% to 15%. By extending the term of your car loan, you increase the risk that your car will depreciate faster than you can pay off the loan. You could end up owing more than your car is worth.

Securing financing with an affordable monthly payment is important. But if that requires stretching the loan out to five or six years, you may want to consider a cheaper car instead.


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