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from The Complete Car Cost Guide

Finding Yourself

Nowadays, it seems you have to pay as much for a new car as you did a few years ago for a house. But as new car prices rose dramatically in recent years, lenders found a clever way to allow people to continue to buy new cars they simply extended the length of loans, thus keeping monthly payments affordable.

In the past, 24-month or 36-month car loans were the norm. But today, 60- and even 72-month loans are common. With the longer loans, however, it takes longer to reach a positive equity position in a car and owe less on it than it's worth. As soon as you drive that shiny new car off the dealer's lot, the car plunges in value thanks to that ol' devil depreciation. But with a shorter length loan, after a year or so of making payments, your car's value will be worth more than you owe on it. Until then, you're "upside down," as they say in the auto business.

With longer loans however, you could be upside down for two, three, or four years. It typically takes 40 to 42 months to build equity in a car if you put 20% down and have a 60-month loan. And therein lies the rub: If during that time you want to trade in your car on another one, you'll be in the frustrating situation of owing more on your old car than it's worth, thus making it all the more expensive for you to buy the newer car.

So, if you must take a longer loan in order to lower the monthly payments on the car you really want, plan on keeping the car for nearly the life of the loan or more. If you can't keep it that long, be sure to choose a car that holds its resale value well because that will reduce the time it takes you to reach a positive equity position.

1998 The Complete Car Cost Guide™ IntelliChoice® Inc. Campbell, CA