Consumers find hope in long-term loans



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Posted on June 12, 2013 at 11:23 PM

Consumers trying to make ends meet may find relief in long-term loans.

Veronica Viveros is an expecting mother in need of a new car with a low monthly payment. 

"I am expecting and we do have a lot of bills and finances,” said Viveros.  “So, I'm looking at about $300 to about $350 a month. That would help out so much."

If Veronica gets a $23,000 car loan, in order to hit her monthly goal, she'll have to take out a 72-month loan.  According to Alec Gutierrez, a senior analyst for Kelley Blue Book, it's those lower payments that draw in buyers. 

"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,” said Gutierrez.

Gutierrez does warn that while long-term is cheaper now, it could cost you more down the road. 

"The longer you extend your term, the longer it's going to take you to get out of a negative-equity position,” said Guiterrez.  “So, consumers that take a longer term find themselves at greater risk of being under water for a longer period of time."

If you are considering a long-term loan, Gutierrez said there’s one important rule of thumb.

"Consumers should try and keep their monthly payments within 20% of their gross income," said Guiterrez. "So, if that means you have to opt for a five- or six-year loan, that generally makes sense."

Bottom line, figure out what you can afford before you go to the dealer.  And don't take out a loan that's longer than 72 months.  Also remember that your interest rate will be higher than a traditional loan.  So shop around and compare costs.