Smart Buyers Wary of Seven-Year Car Loan

Over the last decade the length or maturity of U.S. auto loans has climbed steadily upward. At one time a five-year auto loan was rather uncommon. Today, the usual lenders, as well as automobile acceptance corporations, are offering loans that stretch out up to 84 months or seven years. Any prudent buyer would do well to thoughtfully consider whether an obligation of that length is a good financial option for purchasing their next automobile.Monthly PaymentsOf course, the longer the term of the loan, the smaller the monthly payments will be. Smaller monthly payments can be a way of enticing a buyer to purchase a more expensive automobile. Unfortunately, this may lead folks to buying an automobile they really cannot afford. So, the advantage of lower monthly payments could easily be offset by interest rates and the purchase of a higher-value vehicle. On the other hand,the purchaser may be able to work an 84-month auto loan to an advantage if they have an impeccable credit history, an excellent income, and can negotiate a very low APR on their loan. This would allow owning a nice car without affecting a monthly budget to any sore degree.DepreciationThe main issue regarding such a long-term auto loan is the depreciation of the vehicle over the seven year period. On the average, most automobiles depreciate at the rate of about 15% per year. So, with a seven-year auto loan, the buyer is going to be owing more on the car than it will be worth for more than half the time they are paying on it. The buyer will be stretching out the amount of time where they will be in a condition of negative equity, sometimes called an upside down auto loan. This could be a problem if the owner had to sell or otherwise liquidate the car. Even if the owner threw all the proceeds from the sale of the car towards the loan, he or she would still owe on the loan, and that is not a good thing.Finance FeesOf course, the longer the term of the loan, the longer there is for finance charges to stack up. This can make a vehicle cost a lot more than if it were financed over the more typical terms of 36 to 72 months. Also, more costs could be accrued when evaluating and changing the warranty on a vehicle with such a long-term loan. Especially consider that the vehicle will have up to 100,000 miles on it towards the end of the loan and cars with that kind of mileage need more maintenance and repairs.Alternate ScenariosThere are some other ways a seven-year auto loan could work. If the buyer is just total car aficionado who must have a certain vehicle, this would allow them to purchase a car that they would not be able to afford any other way. They will just have to face the fact that they will be sacrificing a bit of money to do so. Another scenario where a seven-year car loan could work is if the car to be purchased is an investment. If a buyer wants to purchase a classic machine, a certifiable vintage machine, one that will not depreciate, and may even appreciate, due to its age, heritage, or condition, the seven-year auto loan might be the road to take.