Buying a new car is exciting and daunting all at once. The prospect of buying a fresh set of wheels, coupled with likely higher monthly payments can leave you with mixed feelings. With the higher cost of a new vehicle purchase these days (near $50,000 on average) is a lot to take on, but when a dealer says you can bring your costs down by extending the length of the loan, it sure does sound appealing. Think about $700 payments instead of $1,000 payments. Who wouldn't jump at the chance? We tell you all of the reasons why it's not a great idea.

Should You Get The Priciest Car You Can Afford?

You've been eyeing that fancy SUV for months, and you know it's out of reach. You compare it to the one that's at the lower end of your budget range, and it just looks so much better. It has more room, a more powerful engine, leather seats, larger touchscreens, real leather, and even the latest driver assistance features. Your family would be more comfortable in it, it looks way better than the model that's more budget-friendly, and you love how it makes you feel when you drive it. What's not to like?

Well, it's considerably more than you planned (to the tune of thousands, not hundreds, of dollars). It will probably cost a lot more to repair when it's out of warranty, and it also consumes more gas. What's more, basic wear and tear items like tires and brakes will cost more to replace, and those are out of pocket, even during the warranty period. You take a look at the whole picture, and it's just not fiscally smart, so you set it aside for the moment. Smart move, until…

The Draw of Lower Monthly Payments

For the sake of numbers, let's say that fancy SUV you were eyeing costs a whopping $65,000. Your budget is $50,000. It would really put you over budget by a significant amount. You've done the math on a 5-year/60-month loan term. You even have a 20 percent down payment saved up. At 5% interest, your payments would be about $754 a month. This cheaper car actually makes more sense for your bank account. You can manage those payments without sweating much, and it really is sufficient for your needs. It just doesn't excite you as much as the pricier one does.

If you pay the 20 percent down payment ($13k) on the $65,000 SUV and borrow the rest ($55,00). On a 60-month loan, that monthly payment will be a considerable $981, way more than you can afford. But let's say the dealer says you can reduce those payments by a significant amount. How much more?

Even before he does the math for you, he says you can drive off today with that schmancy new SUV. He says you can extend your loan to 84 months, and that brings your payments down to $734 a month, even less than your budget-friendly car! Wow, what a deal! But is it? Consider the fact that this price doesn't even factor in tax, tags, title, registration, and the higher cost of insuring the pricier car.

The Stupidity of a Long-Term Auto Loan

Car loans for 72 months and as long as 84 months (7 years) are becoming the norm these days, but maybe you think it's worth it to get the car you want. The problem is that you're paying way more than you thought you were. Longer payments mean more interest, and that translates to an overall higher purchase price than what you saw on the car's window sticker.

Most people don't think about this because they just look at the cost of the monthly payment. You're paying a high price for a seriously depreciating item (up to 20 percent as soon as you drive it off the lot). To compound matters, that depreciation over the course of just a few years means you'll be what's known as “upside down” on the loan. This means your car is worth less than the money you owe on the loan. Should you decide to sell the vehicle, you'll end up losing severely.

It's a smarter move to buy less car, not more. Keep your payments in your budget while keeping the loan term short. You pay less interest, maintain a manageable monthly payment, and you'll pay off the vehicle before it has the opportunity to be worth less than what you owe on the loan. It also costs less to maintain, gets better gas mileage, and could even be more reliable.