Your financial health depends upon the length of your loan

Rose went to the dealership yesterday to buy a new car. She saw a few cars that she liked. She saw one car, that she could not afford, that she REALLY liked. She drove it, admired it, and fell in love with it.

The salesperson told her that she could have it. It could be parked in her driveway that afternoon. All she had to do was extend the payment term from 4 years to 7 years. That put the payments in her budget of what she could afford. She didn't even need a bigger down payment!

Rose didn't think twice. To own this beautiful car and have the same payment as those other ugly cars? Heck yeah!

Rose drove off the lot in her shiny new car with a 7 year loan - forever to regret her decision.

Why is rose going to regret her decision? Because although Rose loves her new car now, in a couple of years she'll be ready for a new car. And, she'll still owe way more money on this car than it is worth.

Rose's options will be limited at that point:

• Rose can trade the car in, and roll the difference between what it is worth and what the dealership buys it for into the next loan. Bad choice!
• Rose can drive the car until it's completely paid off. Bad bad bad. She will still be paying on the car when it is ugly, out-of-style, and broken down.
• Rose can save up her money to pay off the vehicle when she's ready to buy a new car. That's not good! She could use that money as a down payment on her next car!

Rose will be forever stuck in a cycle of owing more on her car than it is worth. She will be upside down and backwards - and the dealership will be laughing all the way to the bank.

Rose is my fictional character, but more than 50% of all new car loans in the United States are 5 years or longer. Many are up to 7 years. This long payment term allows you to buy a nicer can than you could otherwise afford, because the payments are spread out over a longer period of time.

And dealerships encourage the arrangement for several reasons:

• The salesperson gets a bigger commission for a higher priced car
• The finance person gets more commission for a longer length loan
• The dealership shows more revenue
• The dealership makes more money when you come back for a new car that's worth less than they'll buy it for

The last point is the one that's important for you: unless you make a large down-payment (and you probably won't) you will be upside down on your car. When it comes time to get a new car, you will still owe more than it's worth.

Then, you will be forced to roll the extra amount between what you owe on this car and what the dealership will buy it back for into the next loan. That will put you even further under water next time!

If you actually drive the car for 7 years, you'll be ok, but nobody wants to still be paying on an old, out-of-style, broken down car for years after it has lost it's shinyness and new car smell.

It's a vicious cycle that plays out every day all over the United States.

You can avoid this mess before you get started. You should never finance a car for more than 4 years. 42 months is even better. If you can't afford the payment on a 42 month loan, then you should buy a cheaper car.

It's hard to make the smart decision in the heat of the moment; after you've fallen in love with a car you can't afford, and a salesperson that's saying all the right things. You just have to go into the dealership with your financial health in mind, and be determined to make the decision for your bank account's safety.

Don't get stuck like Rose! Buy your next car the smart way...