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credit & debt

Why Shorter Loans Are Better

It doesn't pay to go out on a limb with long-term loans and CDs.

The stale economy has consumers looking for savings -- and profits -- wherever they can find them. But you should think twice about some recent come-ons that tempt you to lock up your money long-term.

Take seven-year car loans. They’re becoming more prevalent at dealers, where their share of the loan market is growing and the share of more-typical five-year loans is shrinking. Consider: A $26,000 loan at 4.6% (about the average amount and rate for new loans) would cost $3,154 in interest over five years; extend the loan to seven years and tack on another percentage point in interest, which is typical, and you’ll pay $2,334 more.

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You’ll also owe more on the loan than your car is worth for a longer period of time, making it harder to sell and break even if your needs change.

Investors desperate for yield might be tempted by ten-year CDs. The best rate is currently 2.1%, which sounds relatively generous. But with interest rates at record lows and fears of inflation lurking, it’s risky to tie up your cash for a dec­ade. You’ll lose the chance to earn higher yields when rates rise, and the buying power of your money will erode. Consider buying I-bonds, which keep pace with inflation and currently yield 1.8%.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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