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Do extended auto loans make sense?

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Do extended auto loans make sense?

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Extended auto loans increase the usual payment term from the usual 36 or 48 month terms to anything up to 84 months. That’s seven years. Do they make financial sense if you’re trying to finance a new car?

 
In return for a longer term, you get a lower monthly payment. If you’ struggle to balance all your outgoings but need a car for work, this may sound like a great idea. And it could be depending on your circumstances and how you would acquire finance if traditional lending wouldn’t work for you.
 
Extended auto loans
The thing to remember with a longer term is the interest. You may have a lower monthly payment but as interest is charged per annum, the overall cost of servicing that loan will be more. Rather than paying 36x interest or 48x interest, you could be paying up to 84x interest instead.
 
Benefits of extended auto loans can include:
  • Lower monthly payments. The same amount stretched over longer means a lower amount each month.
  • Borrow slightly more. If you have your eye on something normally out of your price range an extended auto loan could make it affordable.
  • Affordability. If you have debt already and would fail an affordability check on a standard auto loan, this may be an option to access finance.
The downsides of extended auto loans:
  • Interest payments. Some lenders charge more interest on loans over 60 months. Even if they don’t, 84x the interest payment is going to be much more than 48x.
  • Negative equity. Due to this increase in interest, you are likely to be automatically in negative equity the moment you sign. Unless you’re putting a sizable down payment, the cost of the loan is automatically more than the car is worth.
  • Age and depreciation. Seven years is a long time in motoring. I don’t know many people who have the same car after a couple of years let alone seven. Can you keep a car that long?
Every borrower is unique so while we don’t usually recommend an extended loan, that doesn’t mean you cannot have one. There are circumstances when they can make sense. If you’re unsure, visit any Car Nation Canada location and we can go through your options with you.
 
Try a lease instead
Extended auto loans won’t often make financial sense so you may be better off trying a lease instead. You don’t get to own the car but for a reasonable monthly cost you get to lease one instead. You can always buy the car at the end of the term if you like it.

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