84-Month Auto Loan: A Good Idea?

Have you noticed something strange about advertisements for car loans lately? It turns out that some lenders are now willing to stretch out car loan payments over an astounding 84 months. For those counting, that is seven whole years. Is a seven-year auto loan a good idea, or should you stick with a shorter loan term?

Benefits of an 84-Month Auto Loan

Lower payments are the main advantage of an 84-month auto loan. However, if your interest rate is much higher on an 84-month car loan than it would be on a 60 or 72-month car loan, you may end up with payments that are similar to a shorter-term car loan.

You won't have your money tied up in your car with an 84-month car loan, which some may see as another benefit. If you have a better use for your money, such as investing at a higher rate of return, then extending a car loan to the longest repayment period possible may be attractive. Of course, these two benefits don't come without drawbacks.

Cons of an 84-Month Car Loan

Many car dealers and consumers focus on the car payment when they're buying a new car. Based on that fact, you may be talked into a luxury sedan with a similar car payment using a seven-year loan even if you were originally planning on buying an entry level sedan using a five-year loan. The payments may end up similar on both vehicles, but you'll be making those payments for an extra two years on the luxury sedan. That move may come back to bite you when you are ready to move on to your next car before the seven-year loan is paid off.

You will pay more interest with a longer-term car loan, assuming car loan interest rates are the same or higher than a shorter-term car loan. To calculate how much more you'll pay in interest, compare the total cost of all payments of a shorter-term loan with those of an 84-month loan. The difference in total payments is the additional interest you'll pay for stretching out your car loan payments over a longer period.

You could wind up in a financial bind should your car get totaled. Insurance companies will normally only pay you what the car is worth when you make a claim, even if you owe more. When you use the insurance money to pay off the car loan, if you are underwater on your car, you'll still owe money on the loan and you won't have a car anymore. To prevent this, you may have to carry gap insurance, which will pay off your car loan even if you owe more than your car is worth. This added expense could make the total monthly payments on a longer car loan just as much as the payments would be on a shorter loan, negating the lower payment benefit of an extended repayment period.

Standard three to five year auto loans often come with standard three to five year car warranties for new vehicles. Unfortunately, when you take out a seven-year loan, many car manufacturers don't include a seven-year warranty in the price of the car. If you don't opt to pay for an extended warranty, your car may break down and require an expensive repair while you are still making payments. This double whammy could put you in a bad financial position at a point in time when your car's value has fallen due to depreciation.

Finally, your financial situation may change drastically over the next seven years. Nothing in life is guaranteed. While we all like to think our financial futures will be brighter than our present day realities, not everyone is lucky enough to end up better off in the future. A seven-year car loan is a major commitment when you have no idea what your future holds. If you stretch yourself too thin and a major emergency pops up in year six or seven, you may wish you had just bought a less expensive car and stuck with a shorter loan term. Always estimate your monthly car payment before deciding on the vehicle you want to purchase.

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Make a Smart Decision for Your Situation

Extended car loans, such as the 84-month loan, are a relatively new loan product. These loans offer lower payments over an extended period, which allows some consumers to buy more expensive vehicles they could not otherwise afford.

Make sure you've carefully considered all of your loan options when buying a vehicle so you can choose the loan term that fits your needs best. Don't forget to shop around to find the best deals, including the best interest rates, on your future auto loans.

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