Should you take an 84-month auto loan?

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When taking out an auto loan, you may be tempted to choose longer terms with lower monthly payments. Longer repayment terms can have some benefits for the right buyer; however, 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?

An 84-month auto loan stretches the time that you have to finance the vehicle to seven years. Using the agreed-upon interest rate, your lender amortizes your loan over this 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.

Benefits of an 84-month auto loan

Here are some of the potential benefits you can enjoy if you go ahead with a long lease:

  • 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 is 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.

Reasons to avoid 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 off your car long after the warranty ends. Try to avoid an auto loan term that exceeds the length of your car’s warranty.

When to consider an 84-month auto loan

There may be circumstances where you have a tight budget 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:

  • A longer term is the only way to fit monthly payments into your budget.
  • 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.

Other auto loan options

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.

How to choose an auto loan term length

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.

However, 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.

If you’re struggling to afford shorter term lengths, you can always take a longer repayment term at the start and refinance your loan when your budget allows for a higher monthly payment. If your lender doesn’t charge a prepayment fee, you can also pay off your loan early and save money on interest.

As you consider term lengths, keep your current situation, needs and 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.

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
Student loans editor