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How to buy a car, with less debt

Key Points
  • In December 2018, the average loan for a new car was just above $32,000, compared with around $26,000 in 2010, according to Edmunds, which provides research on the car industry. The interest paid on the loan swelled to $5,555, from $2,852.
  • The typical term for an auto loan is now 68 months, up from 61 in 2010.
  • However, you may be able to reduce your car debt by exploring other options.
Customers look at a Jeep vehicle for sale on the sales lot of a Chrysler Jeep Dodge dealership in Miami.
Getty Images

Planning to buy a car? You could be driving for a long time before you're out of debt.

As interest rates rise and vehicles become more expensive, that new car smell increasingly comes with larger loans and lengthier terms.

In December 2018, the average loan for a new car was just above $32,000, compared with around $26,000 in 2010, according to Edmunds, which provides research on the car industry. The interest paid on an auto loan is now $5,555, up from $2,852.

The typical term for an auto loan has swelled to 68 months, up from 61 in 2010.

Financing a car is likely more expensive today than ever before, said Jeremy Acevedo, the manager of industry analysis at Edmunds. With the Federal Reserve's recent quarter-point interest rate increase, that trend could pick up, "potentially dampening sales in 2019 as shoppers hold off purchasing," Acevedo said.

However, you may be able to reduce your car debt. Here are some strategies.

Consider a used car

Philip Reed's 21-year-old BMW 
Source: Philip Reed

Used cars are typically less expensive than new ones and so the loans for them are often smaller, said Philip Reed, an automotive writer at personal finance website NerdWallet.

"If you turn on the football game, you will be brainwashed into thinking you need a new car," Reed said. "People don't understand how reliable a good used car can be."

The average monthly auto loan payment for a new car in December 2018 was $558, compared with $413 for a used vehicle, according to Edmunds.

What's more, Reed said, while the average age of a car on the road is 12 years old, the price tag can halve after just three years.

Thoroughly vet the history of any used car you consider buying, Reed said. Using the vehicle identification number, located on the driver's side dashboard, you can check the car's history with the National Insurance Crime Bureau, CarFax or the National Motor Vehicle Title Information Center. You may also want to have the car inspected before you buy it, to make sure nothing was missed on the car's record.

Go to the dealership prepared

You should go to your bank or credit union and get pre-approved for an auto loan before you enter a car dealership, said Rebecca Borne, senior policy counsel at the Center for Responsible Lending. "It puts the consumer in a better bargaining position," she said. "It forces the dealership down on the rate."

Borne also recommends "cross-shopping" at other dealerships to try to lock in the best price on a given car. Autotrader is one database of used and new cars.

Don't be sucked in by low monthly payments, Borne said. If you're able to make higher payments on a shorter loan term you'll save overall.

And resist the often unnecessary add-ons that many dealerships push, she added, such as extended warranties and additional insurance. "They give a windfall to the dealer without giving much benefit to the consumer," she said.

Look for deals

Getty Images

Be on the lookout for car-buying incentives that could save you money, including loans with zero-percent interest or cash-back deals, Reed said. You can learn about these offers on websites such as Edmunds and Kelley Blue Book, or directly with the car manufacturer.

Excellent credit is often needed to secure the zero percent interest rate offers, Reed said, but it can't hurt to apply.

"Even if you fall short," he said, "there's a good chance you'll still beat current rates."

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