Is an 84-Month Car Loan a Good Idea?
If you’re in the market for a new or used car, you may need a loan to buy it. When you work with a lender for financing, you can usually name your monthly budget, and they’ll do what it takes to meet that number or get just below it.
One way lenders do this is to extend the loan period. This is how we have gotten to 84-month car loans. When you finance a car with an 84-month auto loan, the purchase price and finance charges are spread over seven years.
Is an 84-month car loan a good option for you? Consider the benefits and drawbacks of a seven-year auto loan before signing on the dotted line.
Benefits of an 84-Month Car Loan
Low Monthly Payments
The longer you spread out the cost, the lower your monthly payments. An 84-month car loan can make it manageable for buyers on a tight budget to afford a new car. However, this could also signify that the vehicle you’re buying exceeds what you can afford. You may be better off choosing a cheaper model.
Low-Interest Rates
When interest rates are low — as they have been for some time — borrowing for a more extended time can make sense. How much you pay in interest over the loan term depends on the final cost of the car and the interest rate for which you qualify. If you have a lot of debt but can qualify for a low rate, accepting a longer loan term could make sense to tackle the rest of your high-interest debts.
Drawbacks of an 84-Month Car Loan
While there are a few benefits to taking out an 84-month loan, there are also some drawbacks.
Cars Depreciate Quickly
While owning a home is an appreciating asset, meaning the value increases over time, a car is the opposite. New cars lose some of their value the minute you drive them off the lot, and the value continues to decrease as the mileage and age increase.
With an 84-month auto loan, you could be underwater on the loan by the end when you owe more than the car is worth. Suppose you have negative equity and get into an accident where the vehicle is a total loss or decide to sell it before paying the loan in full. In that case, you will still owe on a vehicle you can’t drive anymore. You may be able to roll the negative equity into a new car payment, but that would mean you’re already underwater on a brand-new car.
The Loan Outlives the Warranty
Depending on the car manufacturer, the car loan may outlive the warranty. In this case, you’ll still be paying for the car payment and have to shoulder more of the cost of repairs. The older your car gets, the more it typically costs to repair, making your vehicle cost more than your budget allows.
Higher Cost Overall
The longer you pay on a loan, the more you pay in interest. For instance, you’ll pay about $1,300 in interest on a $20,000 car with a 2.5% interest rate. The same loan over 84 months would amount to about $1,820, over $500 more.
Circumstances When an 84-Month Car Loan is a Good Option For You
While an 84-month loan may not be the best solution for everyone, sometimes you’re on a tight enough budget to warrant it. Here are some reasons an 84-month car loan is a good option for you:
- You have an extended warranty beyond the loan term.
- There is no prepayment penalty.
- This loan term is the only one that fits into your budget.
- It allows you to afford a more reliable or safer car.
- You have higher interest debts and can qualify for a low-interest car loan.
As with most financial agreements, be cautious and weigh the advantages and disadvantages of your options. If you are overwhelmed by debt that makes it hard to buy a new vehicle, contact us for a consultation to see what advice we can offer.