Why you should avoid an 84 month auto loan


Americans are taking longer than ever to pay off auto loans. Data by Experiential shows that the average loan term for a new car is just under 72 months, while used car loans run for around 65 months. Longer repayment terms can have some advantages for the right buyer, but they also come with higher costs, and understanding the trade-offs before opting for an 84-month term is essential.

What is an 84-month auto loan?

Car buyers who cannot afford or want to pay the full cost of a vehicle in cash can turn to auto lenders for the financing they need. Depending on the lender, terms can range from 12 to 84 months, or even longer for certain types of vehicles.

Using the agreed interest rate, your lender amortizes your loan over your chosen repayment term. This process determines how much you must pay each month in principal and interest to reach a zero balance after the term ends.

For example, let’s say you buy a car for $ 20,000 and finance the full amount with an interest rate of 3.49%. If you opted for a 60-month repayment term, your monthly payment would be $ 364. Extend that term to 84 months, however, and your monthly payment will drop to $ 269.

Understanding the term of auto loans

There are several factors that go into deciding the length of an auto loan, including the amount you finance, the interest rate, and your budget. It is not uncommon for dealerships to try to convince car buyers to choose longer terms on their auto loans. Here are some of the potential benefits you can enjoy if you agree:

  • Lower monthly payments: Simply put, you can borrow more money at a lower monthly payment with an extended repayment plan. Choosing an 84 month term may be what you need to buy the car you want.
  • Lower debt-to-income ratio. The main thing a lender looks for when determining whether to approve a loan is the risk that the applicant will not pay off their debt. Part of this assessment includes your debt-to-income ratio, which is the percentage of your gross monthly income that goes toward debt repayment. With an 84-month auto loan, your monthly payments will be lower compared to your income, which can make it easier to obtain this loan and future ones.
  • Cheap money. When interest rates are low, it may be a good idea to borrow money for as long as possible, using the money you save on lower payments to pay off higher interest rate debt.

Dangers 84-month auto loans

While there are obvious advantages to choosing a longer auto loan, it could come back to bite you. Here are some potential pitfalls to watch out for:

  • More expensive. While your monthly payments will be lower with a longer term, the total interest charged will be higher. With the previous example, a monthly payment of $ 364 over five years would result in total payments of $ 21,825, which includes $ 1,825 in interest. If you pay $ 269 per month over seven years, you’ll end up paying $ 22,571, including $ 2,571 in interest. The higher your interest rate, the more you will pay. Additionally, 84-month auto loan rates tend to be higher because longer terms are riskier for lenders.
  • Depreciation. On average, a new car can lose more than 10 percent of its value in the first month after driving it out of the lot, according to Carfax. You will lose 20% the first year and 60% the fifth year. With a lower monthly payment, you run an increased risk of owing more than the value of your car, which means that if you want to sell the vehicle or have it totaled, you will have to pay the difference out of pocket.
  • Repair issues. The older the car, the more expensive the repairs. If you go for 84 month financing, there is a much higher chance that you will have to shell out for these repairs while you still have a monthly payment. If you are on a tight budget and have low emergency reserves, this could cause problems.
  • Warranty expired. Many new cars come with warranties that last for at least three years or 36,000 miles. With an 84-month loan, you’ll still pay off your car long after the warranty ends. Try to avoid an auto loan that has a term that exceeds the term of your car warranty.

84-month auto loan alternatives

Whether you want to use a longer car loan to afford a more expensive car or just to cut down on your monthly expenses, use an auto loan calculator to get an idea of ​​what it will cost you. If you’re not sure if a longer term is right for you, even with the best 84 month auto loan rates, here are some alternatives to consider:

  • Wait and save: If you’re stuck on a specific model but can’t afford it without a longer term, consider waiting a bit so you can rack up enough cash for a larger down payment. Use an automatic down payment calculator to see how much a larger reduction will reduce your monthly payment.
  • Choose a cheaper car: If you don’t have the time to save for a bigger down payment, consider changing your expectations with a cheaper vehicle that allows you to finance in the shorter term.
  • Find room in your budget: If you haven’t already, take a look at your income and expenses over the past few months and determine if there are any areas you can cut back to make room for a higher monthly payment coupled with a loan term. shorter automobile.
  • Rent instead of buying: Leases naturally have shorter terms than auto loans on average – around three years, according to Experiential. Despite the shorter term, however, they charge lower monthly payments as they are based on the vehicle’s depreciation, not its selling price.

Tips for getting the shortest possible auto loan

The shorter the term of your auto loan, the better. Not only does this ensure that you pay less interest, but it will also allow you to pay off the debt sooner. This means that you will have that extra money each month to spend on other important things. Here are the best ways to shorten your auto loan:

  • Make room in your budget for the higher monthly payment.
  • Choose a more affordable vehicle.
  • Put more money on buying the car or trading in your current vehicle.
  • Negotiate with the dealership to lower the car’s selling price, making payments more affordable.
  • Take a longer repayment term upfront, then refinance your loan when your budget allows for a higher monthly payment.
  • Take the longer term and make additional payments to pay off the car earlier than expected.

When considering these and other options, keep your current circumstances and needs in mind, as well as your long-term goals. There is no one auto loan term that is best for everyone, so understanding yourself will help you find the best path forward.

When to consider an 84-month auto loan

There may be times when you need a car sooner rather than later, or you may not have much room to negotiate with a car dealership. When you have limited choices, a long-term car loan may be the only option. Here are a few cases where a long-term car loan might be right for you:

  • You need reliable transportation to get to work, school or daycare.
  • Your credit needs some work.
  • There is no penalty if the auto loan is prepaid.
  • The length of the term allows you to afford a better and more reliable vehicle than the one you owned or envisioned before.
  • Your car has a long warranty, which minimizes overall repair costs in the long run.
  • You may benefit from a low interest rate and want to invest the difference for a better return on your money.

The bottom line

Although you will have lower monthly payments with an 84-month car loan, you will ultimately pay more interest. You also risk owing more on the loan than the value of your car, as well as paying potentially large repair bills on top of your car bill. Before choosing a longer car loan term, be sure to consider how the cost might affect your budget and financial goals.

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