The Seven-Year Loan? Don't Do It

April 1, 2008


If you think a seven-year loan is a smart deal on your new car, think again.

Car companies, dealers and financial institutions have been offering an 84-month financing plan on certain auto loans for a few years. Today, with transportation costs skyrocketing, it's more tempting than ever to stretch out a car loan until you can afford the wheels you want.

But while a seven-year loan may sound good at first, it could put you upside-down--with severe negative equity--for a long time, warns LeaseTrader.com.
Sergio Stiberman, the CEO and founder of LeaseTrader.com, says it's too easy to overlook the danger of a seven-year loan. "It's much easier to calculate and project your financial situation for the next couple of years than an 84-month period. And with all the uncertainty in today's economy, it's very dangerous to assume your financial picture six or seven years from today."

Seven-year loans have become popular tools to get people into cars they might not otherwise be able to afford by lowering the monthly payment. But stretching out the payments doesn't really make the car more affordable. The principal balance remains the same, and when you add in the interest/financing costs (and the depreciation in value over time of the car), people taking out seven-year loans often end up "upside down" -- owing substantially more on the loan than the car is worth.

The economics just aren't there. At a seven-year term, if a car costs $20,000, it will end up costing $5,335 simply in interest, or nearly a quarter of the original car price.

LeaseTrader.com, of course, would prefer you switch into leased car for better payments. We like the advice from AM radio consumer guru Clark Howard even better: "Keep this rule of thumb in mind: If you can't afford a car on a standard 48-month installment plan, you're overbuying."

Simply put, whether you choose a lease or go the traditional route, the important thing is to know your budget. If you can't afford a car without buying into a seven-year loan, buy a less expensive car.

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