Thinking of an 84-month auto loan? Maybe that might be a good idea. With all types of loans, whether for home, car or college, you need to consider exchanging three key things:
- how long you will pay off the loan
- how much each payment will be
- the total amount you will pay for the pleasure of buying things with someone else’s money
You will never get perfection in any category, but it is important to know exactly what tinkering will accomplish a good job in one category for the other categories.
For this experiment, for example, you want to take a USD 10,000 auto loan, and you decide if the loan will be 1,2,3,4,5,6 or 7 years (12, 24, 36, 48, 60, 72 or 84 months, respectively). Suppose the interest rate offered on all loans is 5% per annum.
First, let’s think about the biggest “shocked wallet” of any loan: the monthly payment. While it is by far the most important consideration of any loan, it is definitely critical that you will be able to afford this payment every month without straining your budget or reducing your savings.
How much will you pay each month for each length of car loan:
- 12 months: USD 856.07
- 24 months: USD 438.71
- 36 Months: USD 299.71
- 48 Months: USD 230.29
- 60 Months: USD 188.71
- 72 Month: USD 161.05
- 84 month: USD 141.34
Clearly, if you plan to minimize your monthly payment, the 84-month plan is a winner. But you probably also noticed that there is not much difference between the payments you will make when the number of years increases: what is the big difference, you wonder, between 60, 72 and 84 months of credit?
The answer, my friends, is interesting.
The reason banks, car dealers and other financial institutions are willing to give you money is because they make money from it. The longer you take out the length of your loan, the longer you will pay someone else to do it.
How much interest would you pay in total on different loan terms:
- 12 months: USD 272.90
- 24 Months: USD 529.13
- 36 months: USD 789.52
- 48 Months: USD 1,054.06
- 60 Months: USD 1,322.74
- 72 Month: USD 1,595.05
- 84 Month: USD 1,872.48
Is it worth it to pay an extra USD 550 to increase the duration of your loan from 5 years to 7 years? Maybe. But you might reconsider when you see how much of the money you spend will go to your giver’s pocket instead of paying for your car.
What percentage of the loan is interest for each length of car loan:
- 12 months: 2.66 percent
- 24 months: 5.03 percent
- 36 months: 7.32 percent
- 48 months: 9.54 percent
- 60 months: 11.68 percent
- 72 months: 13.76 percent
- 84 months: 15.77 percent
This means that if you choose a seven-year loan, a full 15% of the amount you pay goes to your car but goes directly to the bank.
So when does it make sense to get an 84-month auto loan and when does it not?
When it comes to going with an 84-month loan:
- If you are cash-strapped. Although I would advise you to consider taking a bus or other public transit if it takes you 8 years to pay off depreciable property that is unlikely to last a long time, if you really need the vehicle and can really only afford the lowest possible monthly payment. take credit.
- Sorry, the above answer is the only good reason for an extended loan.
When it doesn’t make sense to go with an 84-month loan:
- If you can afford a higher monthly payment. Really – why would you prolong the agony of making some money? Being able to afford a larger monthly payment does not make financial sense to pay it off.
- If you have alternative financing available. Can you borrow cash from a relative to buy a vehicle? If so, you should think highly to save yourself on unnecessary interest payments.
- If you really don’t need a vehicle. If you live in a major metropolitan area with reliable public transportation, or if you can easily partner with a neighbor, you have to wonder if paying thousands of dollars in interest is really worth it – not to mention the high maintenance, fuel, and vehicle insurance costs.