Is an 84-Month Auto Loan Worth It?
An 84-month auto loan provides low payments – which can be enticing given that car prices have increased almost 14% over the last year according to Kelley Blue Book – but you’ll pay more for the loan over time. No matter how much you finance, the longer the loan, the more you’ll pay in interest. An 84-month auto loan may be worth it only if it’s the best way you can afford to get a reliable car.
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When to avoid an 84-month auto loan
When you can afford a shorter term
It’s usually cheaper to bite the bullet of a higher monthly payment. While paying more in interest over several years might not break the bank, it’s money that you could use for something else. Here’s an example.
Financing a $25,000 car for 60 months (five years) at 4% APR translates to a monthly payment of $460. You’d pay a total of $2,625 in interest over the loan term. The same loan for 84 months (seven years) means that your monthly payment would be $341 ($79 less), but you’d pay $3,704 in interest ($1,079 more).
When you’d be underwater
Vehicle depreciation is another way of saying that the older a car is, the less it’s worth. Being underwater – when your car loan is more than your car’s value – isn’t a great financial situation.
Imagine if you were to get 100% financing on a new car, which depreciates the standard 20% in its first year. With an 84-month loan, you will have only paid about 14% of its value after a year. You’ll need to make up the difference if you sell or trade in the car, or if it gets totaled in a collision. Standard auto insurance only covers what the car is worth at the time it’s totalled – not how much you owe on the car. You could end up paying thousands more unless you bought additional GAP insurance.
When you’d likely run into repair issues
Most car warranties only last for 36 months (three years) or 36,000 miles (whichever comes first). The older a car is, the more likely you’ll need to pay more for more maintenance and repairs. It could be hard on your monthly budget to shell out for a large repair bill while you’re still making auto loan payments.
When to consider an 84-month auto loan
When it’s the best way to afford a reliable car
An 84-month car loan could be the best way to afford a good-quality vehicle, so you don’t end up buying a lemon car. The low, long-term payments may be the key to putting a reliable vehicle within reach for your budget.
When there’s no early payoff penalty
Maybe you could afford a higher payment most months, but you’d like a little wiggle room in your budget in case an unexpected cost arises. Most auto lenders don’t charge you a penalty fee for paying off your loan early.
If you get an 84-month auto loan and pay extra toward the principal – making the same size payments that you would on a shorter loan – you could have the best of both worlds. You would have a low minimum payment amount to fall back on and, in most months, you could make a larger payment to reduce your overall interest charge.
How do you tackle a long-term car loan? Paying extra toward the principal is only one way you could pay off your car loan faster.When the car has a long warranty
Some automakers, such as Kia, Hyundai and Mitsubishi, offer exceptionally long warranties on their vehicles: typically five years, 60,000 miles, “bumper-to-bumper” warranties and 10-year, 100,000 powertrain warranties. Long-term coverage from the manufacturer can make long-term loans more feasible.
When you qualify for a low APR
If you have great credit, shop around for an auto loan and qualify for a super-low APR, it may be smart to get an 84-month auto loan and use the extra savings each month to invest in products that give you a high return. For example, if your car loan APR is 4% and you use your monthly savings to invest in bonds that give you a 9% return, then you’re netting a 5% profit on your cash.
Alternatives to an 84-month auto loan
Wait and save
While almost everyone likes instant gratification, it could pay off to wait and save up a down payment. Not only will you reduce the amount you’re borrowing for a car, but you could also reduce your APR. Lenders often reward borrowers who make a larger down payment with a lower interest rate because the loan is less risky for them.
Find a less costly car
Some vehicles are more expensive to buy and maintain than others. Industry guides offer some great research that might help you find a reliable car:
- Kelley Blue Book offers a five-year “true cost to own” tool
- J.D. Power gives reliability ratings for vehicles
When you’re car shopping, consider aiming for a vehicle that’s less expensive and reliable, such as a low trim of a reliable model.
Lease a car
Leasing can be a great way to drive a brand new car and have a low payment. There are pros and cons to the process, which you can read about for how to lease a car.
Make room in your budget
You could use a budgeting strategy to make room in your finances for a larger car payment that comes with a shorter car loan. Paying off your loan faster can ultimately save you money.
How to pick the best loan term for you
Here are four steps to help you figure out which auto loan term is right for your finances:
- Look at your budget and use a car affordability calculator.
- Use an auto payment calculator when you go car shopping.
- Apply for car loan preapprovals and see what you qualify for.
- Compare offers to your budget.
In most cases, it’s best to avoid an 84-month car loan. They are more expensive, put you at risk of being underwater and could still stress your monthly budget if you encounter major repair issues while you’re making payments.