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Is a Longer Car Loan Really More Expensive?

NEW YORK ( TheStreet) -- In the old days, you haggled a price for a car, handed over your down payment and took out a loan for the rest -- usually for somewhere between 24 and 48 months. But now the average loan term exceeds five years -- 64 months, according to Experian, the credit-rating company.

It's the longest average since 2008, and it means many borrowers are paying more for their cars than they have to, in the form of extra interest costs. Some borrowers borrow for six years, even seven.

On the other hand, interest rates are so low that the extra cost isn't all that bad, making the long-term loan a reasonable option for those who want to keep as much ready cash as they can.

Why the affection for long-term loans? Simple: the monthly payments are lower because the principal portion of the payment is spread out further. The economic problems and job worries of the past few years have made borrowers reluctant to take on big payments, even if that saves money in the long run.

Big payments for purchases are especially unappealing compared to the much lower payments on leases. And, of course, lenders are happy to push long-term loans because interest rates are higher and the payments just keep coming, and coming and coming.

The BankingMyWay Auto Loan Calculator shows the cost of two $25,000 loans, assuming no other items like fees or taxes, and no turn-in vehicle.

A 36-month loan at the current average rate of 3.858% would cost a hefty $737 a month. A 60-month loan at 4.55% would cost $459 a month, a lot less despite the higher rate.

While that lower payment is appealing, the 60-month loan could incur total interest charges of $2,998, the 36-month loan just $1,515 -- $1,483 less.

On a purely financial basis, the shorter loan term makes sense. The exception would be a buyer who can take the long-term loan and invest the monthly savings at a fat return.

But in the broader context of real life, the longer loan can be a good move. The smaller monthly payment can produce a lot of peace of mind if the borrower worries about a drop in income.

Spread out over the years the extra cost of the long-term loan doesn't seem so bad, so maybe all these buyers taking out loans for five or more years are on to something.

But it won't always be so. If interest rate were higher, as they usually are, adding years of interest payments could add thousands to the cost of a car.

--By Jeff Brown

More on auto loans:

Match car loan to ownership plan

Pay your car loan off early and save

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