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Don't get seduced by the car payment

Knight Ridder Newspapers

How much is too much to pay each month for your car? Ask Scott Hatfield, a 33-year-old teacher from Indianapolis, and he'll tell you that a monthly car payment on $450 or less is a doable deal.

Right now, Hatfield pays about $350 a month for his 2002 Toyota Corolla. But he's guessing that he will pay $400 or $450 a month in two years or so if he buys a new SUV or truck.

He says he can afford it.

He's single, he doesn't have children and he has his eye on a macho Dodge Durango or a hip Nissan Murano. Neither will be cheap. The 2005 Nissan Murano SL AWD he was ogling at the 2005 North American International Auto Show in January had a sticker price of $35,240.

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Take away the glitz, the glam, the handsome gents and stunning gals chatting up the steel on wheels and what we're looking at here is another monthly bill.

Sure, nobody enjoys addressing this point. It's more fun to get caught up in chrome-clad, supercharged, industrial-size bling.

Even so, you have to ask: How much will this sexy ride cost me?

And how much is too much?

The average monthly payment on a car loan is $416 now -- up $100 a month from 10 years ago, says CNW Marketing Research in Bandon, Ore.

"Consumers, in fact, are buying more expensive cars," said Art Spinella, CNW president.

He said 80 percent of all incentives are now used to buy a pricier car or truck than planned. In 1995, about 43 percent of incentives went toward a plusher ride.

Here's another shocker: CNW -- which tracks consumers as they car shop -- has seen consumers end up paying one-third more for a car than they had budgeted when they started shopping..

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Some general guidelines say that car payments should be no more than 5 percent to 10 percent of one's monthly pretax income. So a household making $50,000 a year might consider a car payment of $208 to $416 a month.

But if you've loaded up on credit-card debt, aren't saving a dime for retirement or have a bunch of student loans, spending 10 percent could be too much.

"A lot of people are so excited that they qualify to get a car or a loan that they just go ahead and do it without thinking it through," said Aimee O'Brien, a financial counselor for GreenPath Debt Solutions in Detroit.

Monthly payments deceptive

Too many people focus only on that monthly payment. And that's where they can buy trouble.

Say a dealer says you can have a car for $500 a month. But you want to pay $450.

Sure, the dealer might get you to $450. But if the consumer doesn't read the paperwork, he or she might not realize that he or she got a lower monthly payment by agreeing to a car loan for six years instead of five.

People rarely realize that they're paying more for the car, more for sales tax and more for interest over time. They're just thrilled with that smaller payment.

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"This is what happens every day at retail," said Bob Kurilko, vice president of marketing for Edmunds.com.

Stretching out a car loan from five years to six or seven is a bad move.

"The longer you stretch out that loan, the more likely you'll be upside down on that loan," said Greg McBride, senior financial analyst for Bankrate.com.

Upside down means that you owe more on the loan than the car is worth. The term is a "negative equity balance." It can happen if you make a tiny down payment and take out a long-term loan.

Once you're in this mess, a way to get out is to keep the old car until you pay off the loan.

But about 28 percent of consumers who trade in a car to buy a new one have negative equity, Kurilko said. On average, they owe $3,800 on that old car.

What do they do? They borrow the money for the new car and roll that old loan into the new loan.

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