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The affordability trick that a lot of new-vehicle buyers are using these days can backfire and result in much higher-than-necessary payments down the line.

About half of new-vehicle loans these days are for seven years or more, the latest numbers from J.D. Power show. Stretch payments out over a longer term and you get lower payments. You’ll pay more interest with long-term loans, but people seem OK with that. But do they understand the biggest risk with long-term loans?

J.D. Power numbers show that close to 30 per cent of trade-ins in recent months have had negative equity, which means that the customer owed more on the car than it was worth. That’s no problem when you’re buying a car – the dealer will simply add the amount owing on your old vehicle and add it to the loan balance on your new car or SUV. The result is enormously high car payments, a problem recently covered by Global News money and consumer reporter Erica Alini.

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She writes about a woman who was paying around $550 a month for a 2018 Toyota Corolla bought new with a seven-year loan. George Iny, head of the Automobile Protection Association, figures that’s about $250 a month too high.

Ms. Alini’s report includes a chart comparing a five-year car loan against an eight-year loan. It documents how many more years it takes for the market value of the car with the eight-year loan to be worth more than the loan balance. Two parting thoughts on car loans: Stick to five-year terms, max, and buy vehicles that retain their market value best.

Question for Parents

We’re interested in parental attitudes toward helping your children pay the cost of post-secondary education. Please e-mail me at rcarrick@globeandmail.com and let me know where you stand:

  • We have paid or will pay in full
  • We pay part of the cost, with kids contributing some as well
  • We believe kids should pay their own post-secondary expenses
  • We can’t afford to help

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Rob’s personal finance reading list…

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When your aging parents have no savings

Advice on how to start a discussion with your parents about their financial situation and then address a lack of savings. This blog post is U.S.-focused but very applicable here. A lot of attention has been paid in recent years to parents helping support their adult children. I suspect that supporting aging parents will be more of a thing in the years ahead.

Five questions to kickstart your decluttering

Having recently downsized from a house to a condo, I can vouch for these useful suggestions to help separate essentials from the non-essentials.

The couple’s guide to home-buying

A list of financial and admistrative things that people buying a home with a partner should discuss before the purchase is completed.

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Investing pros share their horror stories

Yes, even the pros make mistakes. Good lessons here.

Ask Rob

Q: I wish to invest in stocks, but I’d like to take advantage of dollar-cost averaging. Is this possible to do with stocks, and if so, how? Or can it only be done with mutual-fund accounts?

A: The answer is yes, for sure. All you’d do is make regular purchases of the stock you’re interested in, say monthly or quarterly. Expect to pay up to $10 per trade. Dollar-cost averaging, for those unfamiliar with the term, means making a regular purchases of an investment through market ups and downs. The benefit is that the cost of your purchases will be an average of market peaks, valleys and plateaus.

Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.

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Today’s financial tool

A financial website offers its list of best robo-advisers. There’s also a primer on how these low-cost portfolio managers work.

What I’ve been writing about

  • Taking a vacation? Think twice about relying on your credit card’s travel medical insurance
  • Canada’s biggest bank teaches young clients a lesson on trusting big banks
  • The trials and tribulations of being a GIC investor – low rates and more

More Carrick and money coverage For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group. Send us an e-mail to let us know what you think of my newsletter. Want to subscribe? Click here to sign up.

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