As new car prices rise, lenders are providing longer and longer terms for auto loans. While five-year (60-month) loans were considered once lengthy, in the first quarter of 2022, nearly two-thirds of recent auto loans had longer terms, according to Experian data.
Now, 84-month auto loans have become more common. Obtaining a seven-year auto loan can help to eliminate your payment per month, but could it be a sensible move financially? That depends on several factors. This is what you need to consider prior to you heading towards the dealership.
When an 84-Month Car Loan Might Make Sense
Stretching out your repayment schedule over seven years can lower your monthly car payments significantly in contrast to, say, a three-year or even five-year loan. This could permit you to purchase a car that might not otherwise match your budget (more on that below).
There are a couple scenarios where an 84-month auto loan might make sense:
- If you invest the cash you'll save: If taking out a seven-year auto loan helps you save $396 per month in your payments in contrast to a three-year loan (as with the example below), you could put that $396 into a good investment whose rate of return outweighs the amount of interest you're paying around the loan. And can you absolutely that—for seven years? And when you have an extra $396 per month to take a position, is keeping your car payment low a real concern?
- If you plan to pay down other high interest debt: If you have $10,000 worth of high interest credit debt, taking out a seven-year car loan would give you more income to put toward your charge card bill every month. However, you'll have even more money to pay for down your credit card debt if you don't buy the car at all or purchase a much less costly one (you could ideally purchase in cash). If you are already having trouble with credit, getting a new loan probably isn't a wise move.
Reasons an 84-Month Car loan Might Not Be the Best Idea
The main reason to prevent an 84-month auto loan: You'll pay more interest. Since these loans are usually targeted at people with less-than-stellar credit, they often carry higher interest rates than three- or five-year loans to start with. But even though you obtain a a low interest rate rate, the more your vehicle loan, the greater interest you'll pay over its life.
Suppose you purchase a $25,000 car without any deposit at 5.09% interest. Here's how three different loan scenarios pan out:
- 36-month (three-year) loan: Payments are $750/month; you have to pay $27,010 total ($2,010 in interest) over the lifetime of the loan.
- 60-month (five-year) loan: Payments are $473/month; you pay $28,369 total ($3,369 in interest) within the life of the loan.
- 84-month (seven-year) loan: Payments are $354/month; you have to pay $29,770 total ($4,770 in interest) over the life of the loan.
If the thought of paying 1000s of dollars in interest doesn't persuade you to definitely stay away from 84-month auto loans, think about these other reasons to avoid them:
- Car depreciation: A new car loses around 20% of its value within the newbie. Within the seven years of the loan, your car's value continues depreciating, possibly enough where you owe more money than the car is worth. That's called being “upside down” or having negative equity inside your car.
Negative equity becomes a real problem if you want to sell your car or trade it set for a newer model. The customer or dealer will only pay you exactly what the car is worth—which means you actually lose money on the deal. When you get into an accident as well as your car is totaled, the insurer will only reimburse you for the car's value, but you will still be responsible through out the borrowed funds.
- Outlasting the warranty: Most new car warranties are great for three to five years. For those who have a seven-year auto loan, however, you'll be making car payments for several years after the warranty has run out. Sure, you can pay for a long warranty—but wasn't the whole point of an 84-month auto loan to keep your costs down? The older your car gets, the more likely it's to want costly maintenance or repairs. Paying for a new transmission while you are still paying for the car itself can be a real kick in the bank account.
- Overextending yourself: An 84-month car loan enables you to buy more car than you are able to really afford—and let's face it: That isn't a good thing. If you are eyeing a luxury car, know that they frequently are more expensive to function, maintain and repair, which can cancel out any savings in the lower payment per month. And when you lose your work, have to take a pay cut or face a significant financial setback, you are always tied to that (seemingly endless) car loan.
How to obtain Low Monthly Car Payments
It is possible to purchase a car without having to spend all of your paycheck each month. Here are some ways to decrease your monthly car payments which make more financial sense than an 84-month auto loan.
- Improve your credit rating. If your credit rating isn't high enough to be eligible for a a lesser rate of interest in your loan, why not wait to purchase an automobile and try to improve your credit score in the meantime? Devote you to ultimately paying down debt and making all your payments on time. In as little as three to six months, you could have a higher credit rating and be eligible for a a much better loan.
- Save for a bigger deposit. A larger deposit can help you be eligible for a better terms on an auto loan. The down payment will also reduce the amount of money you need to finance, helping to make sure that you don't end up owing a lot more than the vehicle is worth.
- Lease the car. Dealers often advertise appealing lease offers that can help you obtain the car you would like with lower monthly obligations than buying. But keep in mind that because you won't own the vehicle after the lease, you'll have nothing to show your money can buy you spent. You could also face additional costs if you go over the mileage limit. If your credit is poor, leasing a car might be difficult anyway.
- Buy a more affordable model or perhaps a used car. When the only way you really can afford the ideal car is with an 84-month loan, it could turn into a financial nightmare. Set your sights on a more affordable vehicle or look for a late-model used car instead.
When to Refinance Your Car Loan
Have you already removed an 84-month auto loan? If interest rates have dropped or maybe your credit score has risen because you got the borrowed funds, you may be in a position to refinance and get better rates of interest. Get your free FICO® Score☉ from Experian to see what your location is. Then contact banks, credit unions an internet-based lenders to determine what interest rates they're offering for auto refinance loans.
Even if you had poor credit when you bought your vehicle, paying your bills promptly, monitoring your credit and paying down debt can all help improve your score relatively quickly. Get the details on how to improve your credit score and how to refinance an auto loan. (Don't wait too long to refinance; in general, lenders would rather refinance loans for cars under Five years old.)
The Bottom Line
If you're looking longingly at pricey new cars, an 84-month auto loan might appear to be the answer to your prayers. However, the tradeoff of lower monthly obligations is rarely worth it of owing a lot more than your car is worth, being tied to endless car payments or spending a lot more than you can really afford. Instead of getting locked into a seven-year auto loan, look for a smarter method to keep your monthly obligations down.