We all love to pay less every month, no matter what the item is. If someone can put us on a payment plan, we're easy prey. It's pretty sad, actually. It seems like no one takes a look at the bottom line of actual costs anymore. See a price tag on a brand new TV, and it says, "$1,200" and we just might walk away. But when it says, "Low monthly payments of $59.99" and you're hooked like a hapless fish. Too bad there are interest charges on top of that, and you end up paying $1,535 after everything's said and done. The same goes for car loans, and many customers are lured into spending way more than they should because payments look a lot lower. 

payment

These days, customers are buying more car than they can really afford because of the lure of low monthly payments. It is, frankly, very deceptive on the part of car dealerships who are selling you on the cost of the monthly payment versus the overall cost of the vehicle.

The Pain of a Long Car Loan

Car loans for 60 months, 72 month and even 84 months (7 years!) are not uncommon these days, but the lender just has you on the hook for longer and makes more money off you in the end. You think you're paying less (and you are every month, but you're doing it for WAY longer). But most folks don't really think about this aspect because they're hooked on the low monthly payment. The end result isn't that they're even saving money every month since the tendency is for most folks to spend that difference elsewhere. 

Take a look at two situations below:

In the end, the difference is significant. $3,905.88 is a heck of a lot of money. That's more than 10% of a $30,000 vehicle. The hard part for most folks is grappling with a higher monthly payment. But let's suppose you spend about $400-$500 a month on entertainment and eating out. Slice that in half and you can make the 48-month loan payments work, and you'll be done with your car payments three years earlier. Plus, interest rates on a shorter loan term tend to be lower, so you're saving even more that way.

Buy Less Car and Save More

civic

If you're daunted by the idea of making a huge payment for a shorter term, consider buying a vehicle that actually costs less. For instance, instead of spending $30K on a loaded midsize vehicle, consider spending $22K on a compact that actually comes close in size and gets better gas mileage.

For example, the Honda Accord EX-L tops out at about $30K. It has room for five, gets 32 mpg highway and has 185 horsepower. The Honda Civic LX (above) costs about $10K less than the Accord. Has plenty of room for four passengers and gets a whopping 42 mpg. So, you get a slightly smaller car that's still practical and good-looking (the Civic is actually more edgy and modern on the outside than the Accord), and you get 10 mpg better on the highway. Using the loan calculator at 4.59% interest, your monthly payments over a four-year loan would be $456.88. That's way better than the $30K car for four months at the same interest rate. 

Don't Get Upside Down 

upside down

Another aspect of the long term car loan is the fact that you'll likely get upside down on the loan. Your car will depreciate significantly within the first few years of ownership. If you owe more on the car than it's worth, you're technically upside down on your loan. Stretching out that car loan beyond five years, and run the risk of becoming what's known as "under water". After that five year period you need to know how badly residuals drop, and then the car becomes more expensive to repair. Paying monthly payments on a car that's seven years old seems downright silly.

In the end, it's all about the total cost of the car. Sure, you need to make some sacrifices every month, but the end result is that you pay thousands less for the car over time and get done with your payments early. Once the car is paid off, you can own it for years to come and only pay for repairs, maintenance, insurance, and gas. It's a win-win situation that won't have your financial hands tied for more years than are even remotely sensible.

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