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Before you drive off with a long-term car loan

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When you're looking at that shiny -- and pricey -- new pickup or SUV, taking a longer loan may seem like a good way to keep the monthly payments down. But the Consumer Financial Protection Bureau is warning that auto loans of six years or longer are significantly riskier than shorter-term financing.

The federal agency noted that in the past year, 42 percent of loans for new and used cars have been for six years or more, compared with 26 percent in 2009. Such loans have a current default rate of 8 percent -- twice that of more traditional five-year loans.

5 of the best deals on new cars
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"The move to longer-term auto loans is opening up more risk for consumers," said CFPB Director Richard Cordray. "Those loans are more expensive and can result in consumers continuing to owe even after they're no longer driving their cars."

With expensive SUVs and pickups soaring in popularity, the average new-vehicle transaction price is now $35,263, according to Kelley Blue Book. As a result, longer loans have proliferated. And the CFPB noted that they're used especially by consumers with lower credit scores. The average credit score for buyers who take out six-year loans is 674. That's 39 points below the average for consumers who took five-year loans.

Here are some tips from the CFPB and from personal finance experts on avoiding loans that could threaten your financial health.

  • Shop for a vehicle you can really afford. If taking a six or seven-year loan is the only way to get to comfortable monthly payments on a vehicle, look for a less expensive choice that you can handle with no more than a five-year loan.
  • Get a pre-approved loan before you shop. If you can have a loan approved by a bank or your credit union, you can then negotiate with dealers to see if they can offer a better financing deal. That might even include zero percent financing during promotions on certain models -- if your credit rating is high enough to qualify. 
  • Watch our for add-ons like extended warranties. Any such additional costs will be wrapped into the amount you're financing and increase your monthly payments. 
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