As time goes on, the average length of American auto loans has steadily increased. Today, it’s not uncommon for lenders and automaker finance companies to offer car loans as long as 84 months…that’s a whopping 7 years of financing! Before entering into any loan agreement that spans such a length of time, you need to be doubly sure that you’re making the right decision for you and your financial future. Let’s look at the pros and cons of 7 year car loans.
84 Month Auto Loans: The Cons
Obviously, when you spread out your payments over a longer period of time, each payment itself becomes smaller. In this way, 7 year auto financing allows for lower per-monthly payments than a shorter loan. Unfortunately, most buyers are tempted to parlay these mathematics into buying a more expensive car than they otherwise would. or could But this begs the question: can you really afford a car this expensive?
The issue is depreciation. Most cars depreciate at a rate of about 15% per year. When you take 7 years to pay off your auto loan, you will find yourself owing more on the vehicle than it’s worth for more than half of the loan term. Basically, you are prolonging the amount of time you spend in a state of negative equity — otherwise referred to as an “upside down auto loan.” What if you need to sell the car for any reason or trade it in? If so, you will have to pay back your bank or lender all of the proceeds from the sale price, only to find yourself still owing them money. That’s not a happy place to be.
Another issue with 84 month auto loans is the finance fees. Basically, there is a longer period of time for finance charges to accrue, making the vehicle in question cost significantly more than it probably would from a 36, 48, 60, or even 72 month auto loan. You should also think about the wear and tear on the vehicle over this extensive period of time. The average American drives his or her car about 15,000 miles per year. That means that, near the end of your 84 month financing term, your vehicle will have accrued around 100,000 miles. Vehicles with this amount of mileage may cost more in maintenance and repairs than a newer vehicle. For this reason, evaluating the warranty of any vehicle subject to a long term auto loan is doubly important.
84 Month Auto Financing: The Pros
The most obvious advantage of long-term financing is lower payments. As we’ve said, however, interest rates and the cost of a higher-dollar vehicle can more than compensate for this advantage. That said, an 84 month auto loan may fit you if you have stellar credit, excellent income, and can negotiate a very low rate APR on your loan. It may allow you to afford the car you want without cutting as much into your monthly budget. Also, if you are a total car nut and absolutely must have a certain vehicle that you cannot afford any other way, 7 year financing may allow you to have what you want; just be prepared to sacrifice some money in the process.
Another scenario where an 84 month car loan might not be such a bad idea is when you a car as an investment. If you are in the market for a vintage or classic machine — one which does not depreciate due to its age, condition, or heritage — then an 84 month car loan might be the right option.