Stretch the Car Loan or Buy a Cheaper Car?

2014 Lexus IS 350

Temptation is a seductress we all must face in our lives.

Rarely is she more powerful than the moment we step foot in a car dealership. When surrounded by shiny sheet metal and the smell of new interiors, the part of our brains responsible for good financial judgment suddenly decides to go party in the Bahamas rather than provide us with good sense in the face of temptation.

That’s why, when you step foot into a Toyota dealership to look at a base Corolla, you spot the Lexus sign across the street and wonder, “What if? How bad could the monthly payment be?”

These days, car payments are getting easier to handle because of longer loan terms. But is falling into temptation’s grip a bad thing?

Sound financial planners (and popes, apparently), will tell you to buy the least expensive car that fits your needs and pay it off as quickly as possible.

The thing is, planners and pontiffs are not car buffs. Why should someone settle for a base model Subaru Legacy when she could step up to a decked-out top-level trim and get all the goodies for just a few more dollars per month? Thanks to longer-term loans than ever before, that’s exactly what’s happening.

A story at The Detroit News says,

Loans of six years or longer account for 30 percent of all financing deals so far this year, including leases, according to research firm J.D. Power and Associates.

Here’s the thing, though: Terms might be longer, but finance rates are relatively low. Extending a term to 6 years or more isn’t that big a deal if the rate is less than 3 percent. If it costs only a couple hundred bucks over the long term to keep the payment low, what’s the harm in upgrading to a more expensive car?

That’s a rhetorical question, because there is no harm, assuming you keep the car for the length of the loan. The dark side of temptation rears its ugly head, though, if you want to sell early into your ownership. That’s when you’ll discover that you probably owe much more than the car is worth.

Which would you prefer, a cheaper car or a longer car loan?


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  1. Having worked as a mechanic on Mercedes has brought me to realize that I’m a fan of reliable cheap cars. I own a 2006 Scion xB, I’ve been a fan of the quirky and spacious design since 2004 when it debuted in the US. When I was finally able to afford a used 1st gen scion xB I bought a base model. Well, they were all base models (except for the release series). Scion has a unique way of selling vehicles, you buy a base model and choose the options you want off of a list. You are never encumbered by options reserved for higher trim levels only. I slowly bought and installed all the options I would have added if I bought the car new. The car is so easy to work on and upgrade with factory extras! I am also the 2nd owner of a 1960 vw beetle which I love for its simplicity and utter reliability. Cheap cars rule!

  2. The irony of this story is that Lexus really isn’t that different from the Corolla, but you’ll pay a huge price for the difference. Down the line, you’ll likely lose the entire price of the Corolla in just a few years of depreciation on the Lexus.
    Use your head and put your money into more sensible purchases than impressing people you don’t know.

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