Why you should avoid an 84-month auto loan

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Americans are taking longer than ever to pay back their auto loans. Data by Experian shows that the average loan term for a new car is just under 72 months, while used car loans have stretched out to roughly 65 months. Longer repayment terms can have some benefits for the right buyer, but they also come with higher costs, and it’s crucial to understand the trade-offs before you opt for an 84-month term.

What is an 84-month auto loan?

Car buyers who can’t afford or don’t want to pay the entire cost of a vehicle in cash can turn to auto lenders to get 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-upon interest rate, your lender amortizes your loan over your chosen repayment term. This process determines how much you have to pay each month in principal and interest to reach a zero balance once the term is completed.

For example, let’s say you purchase a car for $20,000 and finance the full amount with a 3.49 percent interest rate. If you were to opt for a 60-month repayment term, your monthly payment would be $364. Extend that term to 84 months, though, and your monthly payment would drop to $269.

Understanding auto loan lengths

There are several considerations that go into deciding on an auto loan length, including the amount you’re financing, the interest rate and your budget. It’s not uncommon for dealers 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 primary thing a lender looks for when determining whether to approve a loan is the risk of the applicant defaulting on the debt. Part of that assessment includes your debt-to-income ratio, which is the percentage of your gross monthly income that goes toward debt payments. With an 84-month car loan, your monthly payments will be lower relative to your income, which may make it easier to qualify for this and future loans.
  • Cheap money. When interest rates are low, it can make sense to borrow money for as long as possible, using the money you save with lower payments to pay off higher-interest debt.

The dangers of 84-month auto loans

Although there are some clear benefits to choosing a longer auto loan term, 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 $364 monthly payment 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, though, you’ll end up paying $22,571, including $2,571 in interest. The higher your interest rate, the more you’ll pay. What’s more, 84-month car 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 within the first month after you drive it off the lot, according to Carfax. You’ll lose 20 percent in the first year and 60 percent by the fifth year. With a lower monthly payment, you have an increased risk of owing more than your car is worth, which means if you want to sell the vehicle or it gets totaled, you’ll need to pay the difference out of your pocket.
  • Repair issues. The older the car, the more costly the repairs. If you opt for 84-month financing, there’s a much higher chance that you’ll need to shell out for those repairs while you still have a monthly payment. If you have a tight budget and low emergency reserves, that could spell trouble.
  • Expired warranty. Many new cars come with warranties that last the lesser of three years or 36,000 miles. With an 84-month loan, you’ll still be paying your car off long after the warranty ends. Try to avoid an auto loan term that exceeds the length of your car’s warranty.

Alternatives to an 84-month auto loan

Whether you’re hoping to use a longer auto loan term to afford a more expensive car or simply to reduce your monthly expenses, use an auto loan calculator to get an idea of what it will cost you. If you’re not sure whether 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 while so you can accumulate enough cash for a higher down payment. Use an auto down payment calculator to see how much a larger one will reduce your monthly payment.
  • Opt for a cheaper car: If you don’t have time to save for a larger down payment, consider changing your expectations with a less expensive vehicle that allows you to finance for a shorter term.
  • Find room in your budget: If you haven’t already, take a look at your income and expenses for the last few months and determine if there are areas where you can cut back to make room for a higher monthly payment that comes with a shorter auto loan term.
  • Lease instead of buying: Leases naturally have shorter terms than auto loans on average — roughly three years, according to Experian. Despite the shorter term, though, they charge lower monthly payments because they’re based on the vehicle’s depreciation and not its sales price.

Tips to get the shortest-term auto loan possible

The shorter you can get your auto loan term, the better. Not only does it ensure that you pay less in interest, but it’ll also result in you paying off the debt sooner. That means you’ll have that extra cash every month to put toward other important things. The best ways to shorten your auto loan include:

  • Making the room in your budget for the higher monthly payment.
  • Choosing a more affordable vehicle.
  • Putting more money down on the car purchase or trading in your current vehicle.
  • Negotiating with the dealer to reduce the sales price of the car, making payments more affordable.
  • Taking a longer repayment term at the start, and then refinancing your loan when your budget allows for a higher monthly payment.
  • Taking the longer term and making additional payments to pay the car off ahead of schedule.

As you consider these and other options, keep your current situation and needs and your long-term goals in mind. There’s no auto loan length that works 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 circumstances where you need a car sooner rather than later or don’t have a lot of room to negotiate with a car dealer. When you have limited choices available, a long-term auto loan may be the only option. Here are some instances where a long-term car loan might be right for you:

  • You need reliable transportation to get to work, school or child care.
  • Your credit needs some work.
  • There is no penalty if the auto loan is paid off early.
  • The length of the term enables you to afford a better, more reliable vehicle than you previously owned or considered.
  • Your car has a lengthy warranty, minimizing overall repair costs in the long run.
  • You can qualify for a low interest rate and want to invest the difference for a better return on your money.

The bottom line

Although you’ll have smaller monthly payments with an 84-month car loan, you’ll ultimately pay more in interest. You also risk owing more on the loan than your car is worth, as well as paying potentially large repair bills in addition to your car note. Before choosing a longer auto loan term, be sure to consider how the cost could affect your budget and financial goals.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
Edited by
Associate loans editor