Stupid auto financing tricks
Buyers, trying to get more for the 'same money,' are putting themselves deep into the red.
By Peter Valdes-Dapena, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - New car buyers are taking out longer and longer loans to finance their vehicle purchases, according to data from the Consumer Bankers Association. More than half of new car loans made by the group's member institutions were for five years or longer.

That marks the first time that most new car loans have been written for more than five years, the group said. The biggest jump was in six-year loans.

At the same time, leasing is also increasing in popularity, according to data from J.D. Power and Associate's Power Information Network. Leases accounted for more than 21 percent of U.S. new-vehicle sales between December of last year and February of this year. That's the highest level in five years.

The biggest motivation for this, experts say, is that people want to buy more expensive cars without actually paying more each month.

"They want more car, they want more luxury and they're stretching out their loans," said Jack Nerad, editorial director at Kelley Blue Book and author of the "Complete Idiots Guide to Buying or Leasing a Car."

Prices for vehicles of the same size with the same features have actually been going down in recent years, but buyers are purchasing larger vehicles with more luxury features, said Paul Taylor, chief economist for the National Automobile Dealer's Association..

The improving quality of cars may embolden some buyers to take out longer loans, said Taylor. With today's cars routinely running for well over 100,000 miles, customers don't worry about being forced to buy a new one.

There are serious downsides to this approach, though. Besides paying thousands more in interest, buyers taking out long car loans are more likely to find themselves in a financial bind if they need a new car again in just a few years. That could happen because of an accident or simply because a car owner is tempted by a newer model.

They could well find themselves "upside down," meaning that they owe more money on their current car than it's worth. Ordinarily, a new car buyer would simply trade in or sell their old car and use the money they get from that to pay off any remaining loan balance. In this situation, that's not possible.

Longer-term loans increase the chances of that happening.

One commonly-used solution is simple. The remaining balance from the old car loan is refinanced as part of the new car loan and, to keep payments low, the new loan term is stretched out some more. "Financing of over 100 percent of the car's value is not unusual these days," said Nerad.

The loans, then, keep getting longer and longer.

Solutions to the problem

Some car buyers who find themselves "upside down" when going to get their next vehicle probably should have considered leasing. For customers who normally change cars every few years, leasing can make more sense than repeatedly "flipping" cars.

In a lease, the customer pays an agreed upon amount each month to keep the car for a set period of time, usually just a few years. The amount the customer pays is based on the amount of value the vehicle loses during that time.

Leasing works best for customers who are sure they will drive no more than an agreed-upon number of miles per year -- usually about 15,000 -- and who take good care of their cars. Lease contracts include penalties for damages to the car.

If leasing isn't right for you, make sure to research your financing options before going to the dealership. You don't have to take the financing offered by the dealership.

Often, the car company's own financing arm will offer an unbeatable deal, said Brian Reed, vice-president of Capitol One Auto Finance, an independent company that offers pre-approved loans. Having another arrangement ready to go, however, could at least give you some negotiating leverage.

Another way to keep monthly payments down is to simply purchase a less expensive vehicle. With cars lasting longer, used cars can offer a viable, and much less expensive, alternative to a new car, Nerad points out.

When shopping for a car, keep your eye firmly on the price, not the monthly payment. There's no point to discussing monthly payments until you've negotiated the lowest possible price first.

Feedback

If a car salesperson asks about your monthly payment goal before the price of the car has been negotiated, just tell him you want to talk about the big number first and you'll discuss financing later.

Even if you intend to lease the car, negotiate the purchase price first, since that's what your lease payment will be based on.

Another option for those who are tempted by a hot new model is simply to cool the desire and wait a while longer.

"A lot of these people who are buying new cars shouldn't be buying new cars, period," said Nerad. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.