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Carrick on Money -

October 17, 2017

You financed your car over how many years?!? - My rule is that a car loan should never be financed for longer than five years

You’ll get no lectures from me on buying new cars instead of used ones or for financing the purchase instead of paying cash. I have owned cars since I was 16 and have bought them every which way – new, used, with cash and via loans and leases.

One rule I have is that a car loan should never be financed for longer than five years. My strategy for new cars is this: Finance over five years, but pay off the loan in two or three years. The latest data on car payments from J.D. Power suggests I’m out of sync with what the majority of car buyers are doing. Last month, 56 per cent of people financing a vehicle chose a term of 84 months or longer.

I asked members of my Facebook personal finance community what they thought about this trend and the consensus is that it’s problematic. Here are some of the points people raised about long-term car loans:

- You’ll still be paying for your car long after the warranty period is over
- You could end up owing more than the car is actually worth; one person said the value fell below his vehicle’s remaining loan balance in year four of the loan
- Allows dealers to sell you a more expensive car than you could afford over a shorter term

One benefit of financing over five years, max, is that you’ll end your loan payments quicker and be able to redirect your monthly payments to savings. Seven years is a long time to send monthly payments of hundreds of dollars to your car company’s financing division.

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Rob’s personal finance reading list…

How to make a smart car-buying decision
A list of web resources for researching new and used cars covering reliability, fuel consumption, safety and more.

“I trusted him with my money”
CBC reports on a woman who is suing a former investment adviser who allegedly made more than $250,000 in commissions off her account . The claim here is that the adviser engaged in “churning,” which means trading designed to generate commissions rather than to benefit the client.

Introducing the retirement amusement park
How will baby boomers change the retirement experience? Answers here in a story about how a theme park designer has been enlisted to create a Hamilton retirement village.

I ate a $2,000 pizza – and I want it again
Flour imported from Italy, foie gras from France, caviar from Russia and edible gold strips from Germany. Apparently, it tastes amazing.

Today’s featured financial tool
Need a quote for a stock on a particular date in the past? Try the historical quote function on BigCharts. Canadian stocks use the format CA, as in CA:BCE.

Ask Rob
The question: “I would like to invest in an index-tracking, balanced ETF that includes 60 per cent global stocks (Canada, the U.S. and the rest of the world) and 40 per cent in bonds. I am having a hard time finding a fund that fits my criteria.”

The answer: “Balanced funds are huge in the mutual fund world, but they have failed to attract investors in the ETF world. In fact, iShares recently closed down some funds that could be described as balanced funds. You’ll have to build your own portfolio, then. The good news is that just four ETFs will give you the diversification you’re looking for – Canadian, U.S. and international equity funds, plus a bond fund.”

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.

In case you missed these Globe and Mail personal finance stories

- Grappling with high daycare costs? Keep calm and remember, it won’t last forever
- What I learned while working with the wealthy
- Gordon Pape: My Balanced Portfolio has gained 8 per cent annually, but I’m disappointed (for Globe Unlimited subscribers)

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