Why You Shouldn’t opt for a Seven-Year Car Loan

Most people get attracted to a low-interest installment loan, which lasts for a long time. But staying in debt for nearly 7-8 years for a car seems a bit uncalled for and is a poor financial choice.

Your maximum payoff time limit should be four years. It’ll give you ample time with the car, and you can change your car afterward.

Now, if you are opting or have opted for a 7-year car loan, don’t worry. You’re not alone. 72% of new vehicle loans are for seven years and longer.

While seven years is a typical term in finance, these loans can go on for ten years. Do you want to make payments on a car for ten years?

Why People opt for a Seven-Year Car Loan

There are different reasons to opt for this type of loan. The most important of all is financial problems. Some people may not be able to afford a significant monthly payment. If you need to decrease the amount of the payments without lowering the loan balance or interest rate, you have to increase the time for which you are paying the loan.

The other reason is that you can buy more luxurious cars for less a month. For a car that costs $30,000 with a 6% interest rate, if you are opting for a loan of 5 years, you have to pay around $580 per month. Whereas the amount of $438 per month and $394 per month for a loan duration of 7 and 8 years, respectively.

Sound pleasing, doesn’t it? Having a luxury car for $394 per month? Well, it’s not as delightful as it sounds. It’s a technique to lure you in and increasing the profit of the loan provider. Want to know how?

Why Should You Say No to a 7-Year Loan?

• You’re immediately going underwater

Being underwater means owing to the lender more than the car’s worth. It is also known as having negative equity.

For example, if you have a car loan of $30,000 and your car is worth $25,000, then you are $5,000 in negative equity.

Ideally, it would help if you went for the shortest-term loan you can afford. That will make the equity in your car buildup faster.

If you have positive equity in your car, you can sell that car and also get some benefits out of it.

• It will set you up for a negative equity cycle

If you decide to sell the car before your loan period ends, even after giving you credit for the value of the trade-in, you’ll still owe some amount to the lender in a 7-year car loan.

Let’s say if you owe around $5,000, your dealer will try to bury that amount in the next loan. Every time that happens, your loan will increase and will hurt your equity value.

• Higher Interest

You should know that paying an amount in a longer duration; you’re going to face higher interest rates.

According to calculations, around 34% of the total amount is for the interest. Those are insanely high-interest amounts, and you have to pay it for a longer time.

• Maintenance Costs

Well, have you ever heard of a thing like a 7-year manufacturer warranty? If your answer is no, then that’s your third reason for not opting for a 7-year loan on a used car.

If your car is 6 or 7 years old, it’s already above 75,000 miles and is going to need some expensive replacements. If your vehicle isn’t under warranty, those expenses are going to be brutal.

The bottom line is you’ll have to pay for the repairs of an old car and payments for the new vehicle at the same time.

• You’re buying a car costlier than you can afford

As stated earlier, the interest rates for such vehicles are going to be super high. That means that by the time you finish repaying the loan, you have paid a lot more for your car than what you could afford.

This includes maintenance, insurance, etc. It might make driving a lot easier for you, but your wallet is going to have a lot more tension on it due to each monthly installment.

• Car is a depreciating asset

Unlike any other property, the car loses a lot of its value when you drive it. It starts losing its value from the first time you start driving it.

So, even if you try to sell a car with a long-term loan, it’s going to be a negative asset, and even after selling the car, you still have to pay the remaining amount.

How to Avoid Long Term Loans?

If you have already taken a loan by being emotional and thinking that you’re saving money, you may regret it now. Guess what? We have a solution. If your credit score is excellent, you can refinance the loan with better terms and conditions.

Try covering a large part of the value in the down payment. This will prevent you from going underwater, and you can trade this car without adding to your negative equity into the next loan.

If you’re looking forward to a big, shiny sports car, you can always lease it instead of buying it.

You can certainly consider a 7-year car loan, but it’s going to leave a big hole in your pocket every month for many years to come.

Please don’t make a fast decision, go over some facts and some math about all this, and then start looking into it. It should be enough to turn you away from all the techniques of a dealer to lure you into taking a long-term loan.

You might need to borrow money to afford a car. But that does not mean that you have to pay the installments until your hair turns from black to grey.

Image source: Craig Wyzik.