84 Month Auto Loan
Scratch That
7 Year Itch
An 84 month auto loan can be a dangerous proposition. I have seen many people get hurt financially and have their credit ratings suffer tremendously.
If you have your eye on the perfect car and the only way that you can afford the monthly payments is to take on an 84 month car loan, please give me a minute to show you, what I feel, are some very important things to consider.
Here's what you'll find below:
Why 84 Month
Auto Loans Are Dangerous
This can be summed up in two words...Negative Equity!
Negative equity from an 84 month car loan is increased due to two factors:
1. Depreciation
As we all know, cars depreciate over time and you'll now have 7 long years, with month after month of payments, for it to lose value.
For instance, if you were to purchase a new $30,000 car and were to finance $32,100 (including 7% sales tax) for 84 months at an 8% APR, you'd have monthly payments of $501.87.
As soon as you drove your new $30,000 (financing $32,100) car off the lot, you'd lose roughly 20% of it's value. That's a $6,000 hit...Ouch!
Over the next year you could expect to lose an additional 15% of its new $24,000 value...That's another $3,600 hit.
Back to your financing, you've borrowed $32,100 at 8%, which equals $10,057.08 in finance charges, for a grand total of payments ($501.87 x 84) of $42,157.08.
So in one years time, you've made $6,022.44 ($501.87 x 12) worth of payments to reduce your total of payments due to $36,134.64.
Your actual payoff, less finance charges, at this point would be $27,514.
Only problem is your car is only worth $20,400.
That's $7,114
worth of negative equity!
And remember, this is only year one. Good luck trying to trade this vehicle in or even selling it on your own...You're stuck.
It will take you about 5 to 5 1/2 years to get to break even.
What do you
do at this point if:
- You've lost your job.
- Gas prices soar to $4.00 and your driving a Suburban.
- You have a child, or children, and your two door sports car isn't very child seat friendly.
- You just don't like it anymore.
The average trade cycle in the United States is between 27 and 33 months. So if you feel you'll get the itch to buy a new vehicle in a couple of years, then an 84 month auto loan is probably not for you.
2. Higher Finance Rates
The longer you finance the more risk the auto lender takes on and therefore they will charge a higher APR for longer term loans.
In addition to the higher rate, you'll pay an overall higher finance charge simply because you are financing for a longer time.
As you can see from the example above these finance charges can be a pretty significant chunk of change and the more you are paying towards finance charges the less that is going towards the principal each month.
When They May
Be An Acceptable Option
As you can see from what you've read so far, I'm not a big fan of 84 month auto loans. There are times though, when I feel you could consider them.
One key here is to make absolutely sure that this is the right vehicle for you and you know that your needs won't be changing in the near future.
Also be sure the vehicle has everything that you could imagine yourself wanting for at least the next 5-6 years.
Another key is to be extra sure that the payments are very easy for you.
I've seen customers completely max themselves out on payment thinking that they could do it, but six months to a year down the road they realize it's hard to make $500 a month payments when they only earn $2,000 a month.
Do yourself a favor and really think this through before you get locked into an 84 month car loan.
If you are going to finance for a longer term I'd highly recommend purchasing GAP Insurance from the dealership. This will protect you in the event of a total loss of the vehicle. Just be sure to not over pay.
What Lenders
Offer Them
Most major auto lenders have backed away from 84 month auto loans, but some still do offer them for newer vehicles.
You can check out my Bank Auto Loan Rates page to see some of the lenders offering them.
For the most part you'd probably have to finance through a credit union to find these longer term loans. That being said, even some credit unions have backed off of these loans, due to the high risk.
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