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The Real Life Horror Of The 84 Month Auto Loan

It is a common superstition, break a mirror, get seven years bad luck but there’s another way to have an unfortunate seven years…getting an 84 month car loan.

Sure, it may SEEM like it might be a good idea at the time. There’s the allure of ultra-low car payments that come with long-term loans, but you’ll be in debt for nearly a decade, long after the brakes wear out.

A new car depreciates 9% the instant you drive it off the lot. A year later, that same vehicle has lost almost 20% of its value. And by the end of year five – which is normally the end of any new car’s warranty period – your prized possession could be worth as little as 37% of what you paid for it. Oh, and speaking of the warranty running out, six- and seven-year-old cars start needing pricey repairs, and when your car isn’t under warranty, you’ll be on the hook for those expenses. That wouldn’t’ be so bad if you owned your car clear and free by that point, but your 84-month loan makes that impossible. After all the car gets older, but the payments stay the same.

Most people will actually not be making their regular car payment on that same car in year 7. Around year 5 or 6, they’ll get bored with their current ride and trade it in for a new vehicle. Since they’ll still be owing on their car loan, they’ll roll the remaining balance, called “negative equity”, into a new car loan, effectively never getting out of debt.

Unfortunately, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five- or even six-year loans. In a nutshell, people are buying cars they can’t afford and Wall Street is loving it.

According to credit-reporting firm Experian PLC, about a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years. Wall Street investors snap up these loans, which are bundled into bonds. Dealers now make more money on the loans their customers take than on the cars they sell.

But if you are already stuck in a long term auto loan, there is a light at the end of the tunnel. Paying off your long-term car loan is easier than you might think. All it takes is a little bit of wiggle room in your budget.

When you make a car payment, particularly on a loan with a longer term, an obscene amount of your payment goes towards interest. Often as much as 1/3 of your regular car payment is paying interest, and the remaining 2/3 goes towards the principal balance. However, when you make an extra car payment, 100% of the payment goes towards reducing the principal you owe.

Therefore, you can make a smaller extra car payment, and still knock a full payment of your loan term. Nothing changes at the front end, all the payments remain the same, but you have one less payment in the future. Reducing the balance ahead of schedule also reduces the amount of interest you’ll pay over the lifetime of your loan. As a result, you’ll actually be debt-free sooner simply because you’ve saved a ton on interest.

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