If you are considering financing a vehicle for 7 years, you are not alone. Millions of people finance vehicles every year and many of those are offered 7 year loans. So, what is the verdict on 7 year loans, good or bad.
Let’s take a look at some of the pros and cons of these loans.
Pros of 7 Year Auto Loans
Let’s start on the positive side of things. Here are some reasons that a 7 year loan might make sense to you.
You Need A Lower Payment
Obviously, stretching out a loan will lower the payment. Going from a 5 year loan to a 7 year loan will add 24 additional payments and that can make a loan much more affordable.
If you were financing $30,000 at 5 percent for 5 years, your payment would be $566. Stretch that out to 7 years at 6 percent interest and your payment would drop to $453. Over $100 a month saved.
Cars Are Lasting Longer
One justification for the 7 year loan is that automobiles in general are lasting longer. Warranties are also getting longer, representing the confidence that auto makers have in their products.
Where the standard warranty a decade ago would have been 36,000 miles, the 100,000 mile warranty is becoming much more common.
You Want A Better Car
Extending your loan to 7 years could help you purchase a better vehicle with the same payment.
A better vehicle will likely last longer because of better construction. That means that it should last 7 years or possibly even longer.
Cons Of A 7 Year Auto Loan
Now for the negative, and there are a lot of negative consequences to stretching your auto loan out longer.
You Pay More Interest
A lot more interest actually. You will be paying interest on this vehicle for years longer and likely at a higher interest rate.
In the same example used above, if you had a $30,000 vehicle financed for 5 years at 5 percent interest, you would pay $3968 in interest. Stretch it out to 7 years at 6 percent interest and the number jumps to $6813. That is nearly 3000 dollars more.
You Are Backwards Longer
Finance a vehicle for 7 years and you will likely be backwards on the loan for the first 4 years, possibly more if you drive high miles.
What this means is that you had better love this vehicle because you are likely stuck in it. What happens if your situation changes and you need a different type of vehicle? You could be forced to attempt to trade in your vehicle and carry over a lot of negative equity.
Carry negative equity and your next vehicle will likely be of a lot lower quality and you will be paying a much higher monthly payment for it.
You Will Be Out Of Pocket For Repairs
Yes, automobile warranties are getting longer, but even the longest warranties only go to 5 years and 100,000 miles. In addition, many of these long warranties only cover power-train. The bumper to bumper warranty will likely expire at 36,000 miles.
This means that you may be out of pocket for some major expenses in the not so distant future.
You Fall Prey To Dealer Tricks
The 7 year warranty is one of the best things that ever happened to a dealer. It makes it very easy to add on to your loan. That 3000 dollar extended warranty only becomes 40 dollars a month on your payment.
These long loan terms also allow dealers to get people into vehicles that they just really can not afford. The extra 10,000 dollars for the limited model might have been out of reach with a responsible 4 or 5 year loan, but it is attainable on a 7 year one.
Overall, the negative aspects of a 7 year auto loan far outweigh anything good that can come from it. Sure, it can allow you to buy a bigger and better vehicle but this is something that you will likely only appreciate early on in the loan. After a few years, you will be stuck in a vehicle that is worth far less than you owe. If you keep your vehicle, you will likely be forced to pay high vehicle maintenance once you are out of warranty. If you trade it in, you will face a mountain of negative equity.
In general, 7 year auto loans are a bad idea. Instead, pick a vehicle that allows you to stay within your budget and go with a 4 to 5 year loan.