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Longer Car Loans May Be a Good Match for Hybrid Cars

Richard Barrington
LoanBiz Columnist

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The high price of gasoline is attracting car buyers to hybrid cars in record numbers. Hybrid cars, which operate on a combination of gasoline and electricity, get better gas mileage than their conventionally-powered counterparts, and some hybrids represent the most fuel-efficient choices on the market. Their rising popularity has driven up the price of hybrids, and for many car owners a longer-term car loan might be the right solution for affording one of these vehicles.

Pros and Cons of Longer Car Loans
There are pros and cons to taking out a longer car loan. The obvious appeal of  a longer-term car loan is that it makes for lower car payments. For example,  a $20,000 loan will result in much lower car payments if it is stretched out  over five years rather than two years.

The drawback is that longer loans are more expensive over the life of the loan. For one thing, longer loans often carry higher interest rates. And the longer you finance that car, the more interest you will pay out.

The trade-off, then, is between lower car payments and lower total interest paid. A deciding factor can be the planned holding period of the car. It is not wise to use long-term debt for relatively short-term purposes, but if the buyer plans to own the car for several years, a longer-term loan may be the right fit.

Payback Period for Hybrid Cars
Hybrid cars also involve a trade-off. They cost more upfront, but then save their owners in gasoline costs over time. It takes a while for those gas savings to exceed the higher upfront cost--this payback period is generally between 3.5 and 7 years. Because of the length of this payback period, hybrid cars make the most sense for buyers who plan on owning them for a long time--long enough to get past that payback period.

Comparing Payback with a Car Payment Calculator
This makes hybrids a good match for longer car loans for two reasons:

  • Longer loans make hybrids more affordable. Since hybrids are selling at premium prices, many buyers need longer loans to make the car payments fit their budgets.
  • Since hybrid owners should plan on longer holding periods to reap the benefits of gas savings, a longer-term car loan is a viable option.

Car buyers can use a car payment calculator to compare the higher interest expense of a longer car loan with the gas savings they will eventually achieve after the initial payback period.

Source:
Edmunds.com


About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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