Make Sure Your Auto Loan Won't Outlive the Car

When you're ready to car shop for a new or used car, you may have already picked out the color and make of your car. You probably have a general sense of how much you can afford per month. If you are not also considering the long-term financial implications of your auto loan and the life expectancy of your vehicle, you may just be spinning your wheels.

The Life of Cars

Currently the average life span for today's vehicles, according to the the U.S. Department of Transportation, is 128,500 miles, or approximately 12 years. With proper maintenance some makes and models last closer to 145,00 to 150,000 miles, up to 200,00 miles or more. Cars known for their longer-term reliability and life span include the Honda Civic, the Lexus LS and the Toyota Prius. Others have proven to be not so reliable over time, including the Nissan Titan and Infiniti QX56, according to Consumer Reports.

When shopping for a used car and auto financing, consider the car's overall longevity, factor in known repair issues and calculate the actual cost to own at Edmunds.com before signing on any dotted line. Knowing that the Nissan Titan, for example, typically needs hefty repair costs (around $4,000) in the fourth year of ownership (Edmunds.com), is important to consider when choosing a loan term.

Loan Terms

The length of the average car loan term has lengthened over time, alongside the longer life expectancy of the cars. Rather than take advantage of an opportunity to finance a lesser car and pay it off quicker, consumers have instead been borrowing the most they can afford for longer terms. Unless you want be upside down on your auto finance, it's time to turn that thinking around.

For example, a used 2005 Toyota Matrix that costs $12,000 could be financed at 8.74 APR for 36 months, with a total final cost of $13,685.40, $1,685.40 of which is interest. Double the term of the loan to 72 months and you nearly double the interest to 3,462.72, with a total car payment of $15,462.72 over the length of the loan.

Most new car loans (89 percent) are currently for more than four years, with 55 percent of consumers signing on for new auto loans lasting more than five years, according to the Consumer Bankers Association. The numbers are similar for used cars, with 82 percent choosing four-year terms or longer, and 40 percent choosing terms of five years or more.

Do the Math

Considering the average person trades in their new car at 4.5 years or 41,000 miles, consumers are finding themselves upside down, owing money or tacking what they owe onto the monthly payments of their next car purchase. Rather than continue paying for a car you no longer own, consider these tips for ensuring that your auto loan won't outlive your car.

Research - Do your research on the historical value of cars at Kbb.com. Check reliability and actual cost to own a car at Edmunds.com and check dependability ratings at JD Power.

Used vs. New - One way to avoid some of bearing the depreciation of a car is to buy used rather than new. Considering the average new-car buyer trade-in happens between 41,000 and 55,000 miles, or every four years, the used car you are financing should have at least another eight years and about 88,000 miles (using the U.S. DOT's figure of 128,500 mile average life span) or more.

Maximize your Money - Lose the mindset that you have to get the most expensive, high-end car that you can, based on how much you can pay per month. Instead, buy a car within your means and long-term financial goals. Just because you can currently make a $350 to $400 payment on a luxury vehicle with a long loan does not mean you should.

Trade Down - Buy a less expensive car with a shorter loan and make that same payment amount. There is no reason to maximize the life or amount of the loans based on how much you can pay. Instead, stretch your dollar the other way and make higher payments in a shorter amount of time for a car with a lower price tag. You will pay off the car faster, and there will be less of a chance that your auto loan will outlive your car.

Make a Down Payment - As attractive as the idea of "no money down" may sound, it is more financially sound to make a down payment of at least 20 percent when financing a car.

Pay Extra - If you opt for a longer-term loan with higher interest because you want a lower monthly payment or because that is the only rate you can get, pay more than the minimum due during the months when you can. Your auto loan will be paid off more quickly.

When financing a car, consider both the entire cost of the car over time and its life expectancy, not just your monthly payment.

Pam Gaulin

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