Why Financing a Car for 84 Months Quietly Costs You $3,400 More on the Loan

Financing a car over 84 months can increase the cost of your loan by more than $3,000 versus a standard 60-month term. By spreading the cost out over an additional two years, you'll reduce your monthly payment, but you'll actually end up paying more for your car by the end of the term.

Here's a closer look at the math.

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A Longer Loan Term Means More Interest

Each car payment you make is a combination of principal and interest. The longer that the principal balance remains outstanding, the more interest you'll end up paying.

Here's how the math breaks down when it comes to extending a car loan.

Suppose you finance a $50,000 vehicle at a 6% interest rate. Here's what your payments and interest will look like over varying terms:

That's nearly $3,400 in additional interest, or about 6.7% of the vehicle's original price, just so you can lower your monthly payment. That "cheaper" payment actually costs you thousands of dollars more over the life of the loan.

You May Pay a Higher Interest Rate

Car loans with longer terms are usually considered riskier by lenders. This is because the vehicle depreciates in price more rapidly and the borrower stays in debt longer. For this reason, they often carry slightly higher interest rates.

Imagine the same scenario as above, but instead of paying the same 6% interest rate as on a 60-month loan, you have to pay 6.5% to finance the car for 84 months instead:

That small 0.5% increase in your interest rate raises the total cost of your car by over $1,000. Even worse, that $1,000 is pure interest that goes right into the pocket of the lender.

It's Easier To Become 'Upside Down'

Cars depreciate rapidly, often falling in value by 20% or more in the first year alone. This makes it more likely that at some point during your loan -- and possibly for long periods of time -- you'll owe more on the vehicle than it is worth.

This situation, known as negative equity, is often referred to as "being upside down." If you ever need to sell a car that's worth less than what you owe, you might have to come up with money out of your own pocket simply to let the vehicle go.

The Bottom Line

Seven-year car loans are gaining in popularity, as they appear to make monthly payments easier. But the reality is that extending a car loan to 84 months can prove costly.

Before agreeing to a long car loan, ask the dealer or lender for the total interest you'll pay over the life of the loan, not just the monthly payment.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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