Mike Winters at CNBC reported that the $20,000 new car has all but disappeared, and looked at what the most affordable new vehicle looks like now. Warranty coverage, lower maintenance costs in the early years and manufacturer financing can still make buying new the right decision for someone who plans to keep the car for a long time. CNBC asked me where buyers go wrong.
The mistake is stretching the loan to make a more expensive vehicle fit the monthly budget. Dealers will happily show you a 72- or 84-month term because it makes the payment look manageable. A longer loan term lowers the monthly payment, but it increases total borrowing cost over time and can leave you owing more than the vehicle is worth if you sell or trade it in before the loan is paid off. That negative equity then gets rolled into the next loan, and the cycle compounds.
My rule with clients is to set the term first, ideally 48 months and no more than 60, and let the term decide the car, not the other way around. If the payment does not work at that term, the car is too expensive, no matter what the monthly number says.
A new car is a depreciating asset. Financing it for longer than you will own it turns a purchase into a lease with worse terms.
Read the full article at CNBC →
