Are you considering an 84-month car loan for lower monthly payments? Think again. You could end up paying significantly more in interest over the long haul, leaving you “upside down” on the loan. Plus, as your car depreciates over time, you’ll be liable for more than the value of your vehicle. And don’t forget about the potential for costly repairs as your car ages. Instead, opt for a shorter loan duration to save money overall. While monthly payments may be higher, you’ll pay less in interest and be able to pay off the car faster, giving you more financial freedom in the long run.
The Temptation of an 84-Month Car Loan
When it comes to purchasing a car, many buyers are drawn to the idea of an 84-month car loan, also known as a 7-year car loan. The temptation of a lower monthly car payment, allowing for the purchase of a more expensive vehicle, and the ease of a longer-term loan may seem like the best option. However, it is important to consider the potential consequences of committing to such a lengthy car loan.
Higher Interest Rates and Long-Term Costs
Despite the appeal of lower monthly payments, there are some significant drawbacks to an 84-month car loan. One of the most significant disadvantages is that you will end up paying significantly more in interest over the life of the loan. With a longer-term loan, the interest rate is typically higher than with a shorter-term loan. This means that while you may be paying a smaller amount each month, you will ultimately pay significantly more in interest over time.
Furthermore, a longer-term loan means you will have to carry the debt for a longer period. This can lead to long-term financial strain, making it more difficult to plan for future expenses and invest for retirement.
Negative Equity and Depreciation
Another potential pitfall of an 84-month car loan is negative equity. This refers to the situation where you owe more on your car loan than your car is actually worth. This can happen much more easily with a long-term loan, as the car’s value will depreciate over time.
Depreciation is the decline in value of a car over time. According to Edmunds, on average, a new car will lose around 20% of its value in the first year and an additional 15% each year for the next several years. By the time you reach the end of an 84-month car loan, your vehicle may be worth significantly less than what you owe on it. This can create a huge financial burden if you need to sell your car before your loan term is up.
PRO TIP: It is important to factor in foreseen depreciation when calculating the amount of money you can afford to spend on a car. Doing so will reduce the likelihood of negative equity.
The Risk of Unforeseen Repair Costs
One of the biggest risks of a long-term car loan is unforeseen repair costs. Cars inevitably require repairs, and the older a car gets, the more likely it is that major repairs will be needed. With an 84-month car loan, you could still be paying for your car when significant repairs become necessary. If you do not have the money to pay for these repairs, it will create added financial strain and could lead to further debt.
HINT: It is recommended to set aside a portion of your monthly car payments in a savings account for future repairs costs to avoid a potential financial burden.
Examining the Benefits of a Shorter Loan Duration
While an 84-month car loan may seem like the better option, the benefits of a shorter-term loan are often overlooked. A shorter loan term means a lower interest rate, saving you money over the life of the loan, and potentially saving thousands of dollars.
With a shorter-term loan, you also have the advantage of building equity in your vehicle faster. This means that if you do decide to sell your car, you will owe less and may even have gained equity. Additionally, with a shorter-term loan, you will pay off your car more quickly, freeing up money for other expenses or investments.
PRO TIP: Try to aim for a loan duration that allows you to pay off your car loans in 36, 48, or maximum 60 months, keeping in mind your financial situation.
How to Make the Most of Your Auto Loan Decision
When considering a car loan, it is important to consider not just the monthly payments, but also the long-term costs. Always try and aim to stay within 25% of your monthly income range. Budget for ongoing maintenance and factor in a ”repair fund” to plan for emergency repair costs.
Also, be sure to do your research before making any decisions. Look up the interest rates of different loan terms and compare insurance quotes. Compare loan terms from different lenders and choose the one that is right for you.
HINT: Use an online car loan calculator or speak to a financial advisor to better understand the total cost of your car loan.
Understanding the Pros and Cons of Longer Auto Loans
When deciding on a car loan duration, it is important to consider both the pros and cons. While longer car loans may offer lower monthly payments, they ultimately come with a higher overall cost. Shorter loan terms allow for lower interest rates, faster equity building, and less financial strain in the long run.
Keep in mind, a longer-term loan will inevitably lead to significant interest charges, and depreciation often will lead to negative equity in the car. Therefore, it is best to consider a shorter-term loan unless your financial situation requires otherwise.
PRO TIP: A car is a big purchase, so don’t rush a decision. Take the time to carefully consider all options before making a decision.
Getting Professional Advice Before Finalizing Your Auto Loan
Finally, when it comes to making a big purchase like a car or taking out a car loan, it is always wise to seek professional advice. Speak to financial and automotive advisors to help you make the best decision. Consider the ABCs of car loans- Aim for the monthly payments you can manage, Budget and plan for ongoing expenses, and Compare all deals available.
It is better to be informed and make a sound decision, even if it takes longer to find the right loan for you. You are not only purchasing a car, but you are also making a long-term financial commitment, and you want to make sure that your commitment is sustainable towards your future goals.
HINT: Financial planning is essential when it comes to taking out a car loan, especially if you are going for a longer-term duration. Seek expert advice from professionals who can help you to make an informed decision for your future financial goals.