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