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The risks and rewards of a long-term car loan

The risks and rewards of a long-term car loan

By Vince Vitrano, Stephanie Graham. CREATED Aug 9, 2013 - UPDATED: Aug 9, 2013

MILWAUKEE - Veronica Viveros is in the market for a new car, but will soon have new demands on her monthly budget that force her to shop for a longer-term loan. 

"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 1st grade by the time she pays that car off.

Alec Gutierrez is a Senior Analyst for Kelley Blue Book.  He 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.

"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," Gutierrez warns.

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.

Steve Foresta is General Manager at O'Hare Auto Group.  He says, "The trend in the last 10 years is people have kept their cars longer.  The cars have been built better."

Experts point out not all long-term loans are bad.

"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," Gutierrez explains.

Most experts do not recommend 96-month loans, which are also now available.  Whatever you decide to do, figure out what you can comfortably afford to pay for a new car before you go to the dealer. 

Veronica is leaning towards a 6-year car loan. That way her car expenses can take a back seat to the money she needs for her growing family.  "It would work out great for me."

Remember that interest rates on loans that go 72 months and beyond will be higher than traditional loan periods. Shop around before you hit the car dealer by comparing costs at websites Bankrate or Edmunds.