Remember how excessively easy home loans got us into the recent subprime lending mess? Well, here's a new pickle: Automakers are now offering seven-year loans to car buyers. The credit divisions affiliated with Toyota (NYSE: TM ) , General Motors (NYSE: GM ) , and Ford (NYSE: F ) are all doing so, as are some credit unions and other lenders.
The appeal is obvious: Long loans offer lower monthly payments, which will enable some people who couldn't otherwise buy a car to do so -- thereby turbocharging sales. Of course, if they then keep their cars for seven years, they may end up not buying a new car for a long time, so the ultimate effect on sales might not be so good.
So what's the problem for consumers? Unlike homes, cars tend to depreciate fairly quickly over time. If you bought your car a few years ago and you want to sell it now, there's a good chance that with a seven-year loan, you'd owe more on it than you could fetch by selling it. Cars are often worth only half of their original price after three years or so.
There are plenty of other kinds of unwise loans, beyond taking on too hefty a mortgage or signing up for an unadvisable kind of mortgage. (Interest-only mortgages, for example, should be of little interest to many buyers.) Think about buying stocks on margin, for example. That involves borrowing money from your brokerage, usually to buy stocks. When I checked recently, I found that borrowing $10,000 to roughly $25,000 from TD AMERITRADE (Nasdaq: AMTD ) would cost you 9% in interest, while it could cost 9.375% at Merrill Lynch (NYSE: MER ) and 8.75% at Charles Schwab (Nasdaq: SCHW ) . (The brokerage you use can make a difference. Learn more about choosing the best one for your needs via our Broker Center.)
Suppose you borrow $10,000 on margin at 9% in order to buy shares of a company you're excited about. If it doesn't start advancing in short order, you'll be forking over interest expenses for a while. If the stock you bought takes a few years to perform, you might pay several thousand dollars -- just for the chance to make, uh, a few thousand dollars. If the stock swoons instead, you'll end up selling it for a loss, and you'll have paid interest for the privilege.
In short, Fools: Be careful with any loan you take out.