Yahoo Autos What Is an 84-Month Auto Loan?
An 84-month auto loan is a loan with a term that lasts 84 months. This means that you will have 84 months, or seven years, to pay the lender back the amount you borrowed. This is a longer loan term than what was once typical. Only certain lenders offer such long term lengths.
Car Loans Are Changing
As car prices rise, car loans are changing. Lenders are offering loans with higher amounts and longer terms than what used to be common. The longest loan amounts used to be 60 months or five years, but this is no longer the trend. According to Experian, almost two-thirds of the loans approved in 2019 were longer than five years. Now the average car loan term is 68 months.
What Are the Benefits of a Longer-Term Car Loan?
When deciding on the right car loan term length for you, Lending Tree says to consider these benefits of an 84-month auto loan:
Lower monthly payments
More money for other debt payments
Opens up a higher price range of vehicles
More money in savings or investments
Lower Monthly Payments
Doug'sCreditCenter.com reminds us that the same amount of money stretched over a longer-term means lower payments each month. For example, a loan for a vehicle that costs $20,000 with a five percent interest rate works out to the following monthly payments for various term lengths:
Five-year loan (60 months): $377/month
Six-year loan (72 months): $322/month
Seven-year loan (84 months): $283/month
So, every month, an 84-month loan could free up almost $100 each month over a 60-month loan.
More Money for Other Debt Payments
Compare the interest rates between your approve car loan and other debts you have. If you have credit card debt, a mortgage, or student loans that have a higher APR than your car loan, it might be wise to stretch out your payments to allow for more money to pay off other debts with more interest. Keep in mind that a car loan is more debt, so if you are finding yourself in a lot of debt, it might be better to wait until other debts are paid before buying a car.
Opens Up Higher Price Range of Vehicles
As previously noted, longer loan terms provide lower monthly payments. This means that you may be able to afford a higher-priced vehicle with an 84-month auto loan rather than a 60-month loan. Be careful when budgeting this way. You never want to take on a car loan that will stretch your monthly budget so much that payments are a struggle.
More Money in Savings or Investments
Other options for using the money that a longer loan term frees up each month include savings and investments. It's always good to have built up a savings account ready for emergencies, so consider adding $50 each month to your savings instead of getting a shorter loan term. If you have good investment opportunities, they are a good place for extra monthly money.
Keep in mind that long term loans are typically only made available to applicants with higher credit scores.
Are There Any Negative Aspects of a Longer-Term Loan?
Along with the benefits of a longer-term loan, there are some negative aspects that MagnifyMoney.com says to keep in mind:
Higher interest rate
More interest paid over the life of the loan
Chance of going upside down on the loan
Hitting warranty expiration
Higher Interest Rate
In most cases, the longer the loan term, the higher the interest rate. Lenders want to get their money back from the loan, so if they are going to have to wait longer, they are going to charge you more interest. In some cases, people with excellent credit can land a long-term loan with a low APR, but even then, they'll still pay more interest over time.
More Interest Paid Over the Life of the Loan
Because you'll be paying off the loan for a longer period, interest will have a longer time to accrue. Consider the following numbers using the loan for $20,000 at a five-percent APR mentioned earlier:
Five-year loan (60 months) at $377/month: $2645 total interest paid
Six-year loan (72 months) at $322/month: $3191 total interest paid
Seven-year loan (84 months) at $283/month: $3745 total interest paid
This is a difference of more than $1000 in interest from a 60 month to an 84-month auto loan.
Chance of Going Upside Down on the Loan
Because new cars tend to lose 20 percent of their worth within their first year off the lot and then 15 percent each year after that, a longer-term loan gives the car more years to lose value. You're also paying less against the principal amount of the loan each month, so as you pay, the car continues to drop in value. Depending on the condition of the car and the amount of your loan, this could lead to you being upside down on your loan or risk it becoming delinquent.
Being upside down or having negative equity means that your asset is worth less than you own on it. So, if you were to try to sell it and it's only worth $7000 but you still own the lender $8000, you will lose money. This becomes a major issue if the car is totaled in an accident. GAP insurance can help avoid this issue.
Hitting Warranty Expiration
Warranties for new vehicles typically last three to five years. An 84-month auto loan surpasses the length of any new car warranty, which presents a risk of having to pay for major repairs before the car is paid off. Also, as your car ages, it is more likely to need repairs. Extended warranties are an option, but that will only add to your monthly costs.
Can I Enjoy Lower Monthly Payments Without a Longer-Term Loan?
If your main reason for wanting an 84-month loan is to enjoy lower monthly payments, you may have some other options.
Here are a few ways to get lower monthly payments without a longer-term loan:
Make a larger down payment
Lease instead of buy
Purchase a less expensive car
Buy used instead of new
Find a cosigner
Refinance
Make a lump sum payment against the principal
Taking these items into consideration can help you determine if an 84-month loan is the right option when purchasing your next car.
Sources:
https://www.experian.com/blogs/ask-experian/are-84-month-auto-loans-a-good-idea/
https://www.lendingtree.com/auto/84-month-auto-loan/
http://www.dougscreditcenter.com/84-month-auto-loans/
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