There was a Wall Street Journal article this morning entitled When a $38,000 Car Costs $44,000. Unfortunately I can’t link the article as the WSJ doesn’t provide full copies of their articles online, but I do encourage anyone interest in personal finance to give the journal a trial run. I always find at least several interesting, well written articles on finance or investing.

Today’s article talked about the increasing price of cars, which is not necessarily due to manufacturers, but instead how much consumers are paying through interest and amenities. Apparently, seven, eight, or even nine year loans are common nowadays. Not only does this sign people up for a nearly decade worth of monthly payments, but it also often increases the interest rate in the process. For instance, the difference between a three and seven year loan amounts to more than $5,000 in interest alone (using the example of a 2007 Chrysler 300C).

The problem is that these longer term loans drastically cut the number most everyone focuses on: the monthly payment. The actual full cost of the car is often not even considered (researchers say few car buyers even know the full cost of the car when they purchase it).

People are also continuing to trade in a car after an average of three years. This was more acceptable when the average loan was three years, but someone who trades in a car after three years who originally signed up for a seven year loan will owe much more on their new car loans than what their existing car was worth.

Not only that, but more and more people are also buying close to fully loaded cars. I always used to chuckle at seeing old, beat up used cars with $2000 spoiler fins on them that probably cost more than the car itself. That type of mentality is actually common nowadays, with people paying thousands of dollars for televisions and navigation systems in cars whose purchase price isn’t even above $20,000.

I purchased my first car on a five year loan in 2003. At the time, I was in college and only working part time, so it was a bit of a risky investment. The five year loan allowed me to make affordable monthly payments. Did I make a mistake signing up for a five year loan instead of four or three years? No, because I was able to negotiate a 1.9% interest rate, which when compared with the average interest rate of 6% today looks fantastic. I also skipped on extra features such as a sunroof and keyless entry. While I desperately wanted a navigation system, I instead waited and was able to purchase a Mio C310X GPS unit for $150!

It is important to always keep in mind the full purchase price of a car, or any other purchase you are financing over a long period of time. While the monthly payment may look attractive, the interest you are paying to allow for that lower monthly amount can often add up to a very large sum.