For many people, the only way to buy a vehicle is to take out an auto loan. Such loans are widely available for people with a good credit score. Experts suggest steering clear of 84-month loan periods, however, or be prepared to pay vast sums of interest.
At first, taking out an auto loan for a long period seems like a good idea. It allows you to get the car you want and make smaller repayments, which are stretched over seven years. There are many potential issues and various factors to consider, though, one of which is the increased interest cost.
J. David Krekeler, of law firm Krekeler Strother, explains that many consumers are tempted by the cheaper monthly payments. For example, a $30,000 loan spread over five years, with 6 percent interest, has repayments of $579.98 per month. Extending the period over a further two years brings those payments down to $438.26. The interest adds up, however, and soon you will have paid around $2,000 more, making your $30,000 vehicle cost $36,800. Krekeler's example is based on a good credit score. A lower credit score could result in interest rates of 13.86 percent, boosting the cost of the vehicle to over $47,000.
Using an 84-month loan could also push you over your budget. Often, dealers will use such a long term to stretch your finances and convince you to buy a more expensive car than you can really afford, says expert Matt Smith. Consumers with a $19,000 budget might end up going home with a $21,000 car on a far longer auto loan, for example. Smith points out that, in addition to the extra $2,000 of payments over 24 months, you would also be paying a further 24 months of interest.
Auto loans remain essential for many, but it's best to avoid loan terms of seven years or more.
If you are interested in a personal loan, visit our curated list of top lenders.
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