More new-car buyers are choosing long loans stretching out past six years or going for leases in an effort to keep monthly payments in check as car prices climb. Loans with terms beyond six years surged 19 percent in the fourth quarter of 2013 compared to a year earlier to account for 20.1 percent of all new vehicle loans, Experian reports. All other loan categories declined or were basically flat.
The trend has surfaced as the average amount financed for a new car reached the highest since 2008, averaging $27,430 in the quarter, Experian says, with an average monthly payment of $471. Consumer advocates say dealers try to get prospective buyers to look at the monthly payment rather than the total cost. "They want to sell you the most expensive car or truck possible so they come up with financing options that make it seem like you can afford more than you can," explains Mike Sante of the financial website Interest.com. He says this tactic is one of the industry's "classic tricks" to persuade consumers to purchase vehicles that are beyond their financial means.
According to Sante, buyers should make a down payment of 20 percent on a vehicle, finance the rest of the cost over four years only, and walk away from deals where the final cost exceeds 10 percent of the household's gross income.