Maybe the last time you went in to trade your vehicle at the car dealership you were sent out with some disappointment. You discovered your car wasn't worth what you thought it was. Worse yet, it wasn't worth what you owed! More often than not this was an obstacle I had to overcome on at least a weekly basis.
All to often when we originally purchase our vehicles we tend to be attracted to the lowest payment possible. Generally, unless you put money down. This can only be achieved by stretching the term of the loan out to the limit of what banks will do on a certain vehicle. Because of better warranties and increased reliability and longevity of a car's life nowadays, 84 months has become more available to more people than ever before.
That is seven years of your life you will be paying for this vehicle. Sure the payment might look pretty sweet but it isn't doing you any favors in the long run. Go up in term, you go up in rate. You go up in rate, you pay more interest. Pay more interest, and you are paying less on the principal balance of the loan. Thus, losing equity. To put it simply. Equity is what it's really worth vs what you owe. You will almost never stay equitable in a vehicle with a 6 or 7 year loan. I really want to say never there but I just threw the almost in there to cover my butt. The truth is there is a good chance you will not stay equitable in a 5 year loan unless you at least pay your tax, title, and license at sign-up. In any of these long term loans you will not see any equity return until the last year or two. Even then, it won't be anything staggering.
The car market can be pretty wishy washy. Fuel prices can greatly influence the market and so can some bad press. If you have any of these prolonged term loans and you find the market on your vehicle has fallen a year or two after you signed. You will almost certainly be heartbroken. How can you prevent this from happening? Well, you probably won't like this answer. Money down and shorter terms. I have no problem with 5 year loans, they are very common. Just at least pay your fees up front. All too often people roll this right into the loan and when they find out they are $2000 upside down on their car later they're pissed. Uncle Sam got that money. Your dealership didn't get it. It is not part of the price of the car, just remember that.
While most people cannot do this, or they don't really want to I should say. Put some money down and take out no more than a 5 year loan. 36 and 48 month terms I highly recommend. In the case of these your payment may be higher but you will remain equitable even without putting money down. 72 and 84 months is a long time to pay on a piece of metal folks. Don't let the things you own, own you.
On the other hand maybe equity is not a concern for you. If you have no intentions of trading the vehice before you pay it off or you know you will be keeping the vehicle for the duration of the loan then I say go for it.This is a difficult thing for anyone to truly foresee going into an extended length loan term though. Just bear in mind you are going to pay a significant more amount of interest in the long run.
Friday, July 29, 2011
Payment Terms and Equity
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