Stretching out a car loan over 7 years? Are you stupid?!


One of the keys to achieving financial success is avoiding doing exceptionally imbecilic things with your money. Unfortunately, the frequency of people doing one of the dumbest things you can possibly do is on the rise.

With bleak forecasts for the car industry, USA Todayreports that Toyota Motor Credit acknowledged at a meeting last week that, since August, it has been making seven-year loans to cut monthly payments for buyers and boost sales.

There are a few reasons that you're stupid if you enter into a deal like this. First of all, with new cars losing about half their value in the first few years, there's a good chance that you will very quickly owe more than the car is worth. Second, a longer loan means you'll pay more in interest. Third, if you need to stretch out payments over 7 years to avoid a car, you are buying way more car than you can afford.

Why do people do loans like this? A longer loan allows for smaller monthly payments, allowing people to buy cars they wouldn't be able to afford with shorter loans and bigger payments.

Here's the thing to remember: if you need a car loan to buy a car, that means you can't afford the car. If you can get a really low interest rate, it might make sense to take out a loan. But financially intelligent people generally avoid using leverage to acquire depreciating assets. And only morons take out 7-year car loans.