Why avoid an 84-month auto loan
Americans are taking longer than ever to pay off 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 are spread over about 65 months. Longer repayment terms can have some benefits for the right buyer, but they also come with higher costs, and understanding the trade-offs is essential before opting for an 84-month term.
What is an 84 month auto loan?
Car buyers who cannot afford or do not want to pay the full 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 interest rate, your lender cushions your loan over the chosen repayment term. This process determines how much you must pay each month in principal and interest to reach a zero balance when the term ends.
For example, let’s say you buy a car for $ 20,000 and finance the full amount with an interest rate of 3.49%. If you were to go for a 60-month repayment term, your monthly payment would be $ 364. Extend that term to 84 months, however, and your monthly payment would drop to $ 269.
Understanding the term of auto loans
There are several factors to consider when deciding how long a car loan is, including how much you finance, the interest rate, and your budget. It is not uncommon for dealers to try to convince car buyers to choose longer durations 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 with 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 ratio. The main thing that a lender looks for in deciding whether or not to approve a loan is the risk that the applicant will fail to repay their debt. Part of this assessment includes your debt to income ratio, which is the percentage of your gross monthly income spent on debt repayment. With an 84-month auto loan, your monthly payments will be lower compared to your income, which can make it easier for you to qualify for this loan and your future loans.
- Cheap money. When interest rates are low, it may be a good idea to borrow money for as long as possible, using the money you save on lower payments to pay off higher interest rate debt.
Dangers 84-month auto loans
While there are obvious advantages to choosing a longer car loan term, it could come back to bite you. Here are some potential pitfalls to watch out for:
- More expensive. Although your monthly payments will be lower over the longer term, the total interest charged will be higher. In the previous example, a monthly payment of $ 364 over five years would result in total payments of $ 21,825, including $ 1,825 of interest. If you pay $ 269 per month over seven years, however, you’ll end up paying $ 22,571, including $ 2,571 in interest. The higher your interest rate, the more you will pay. In addition, 84 months auto loan rate tend to be higher because longer terms are riskier for lenders.
- Depreciation. On average, a new car can lose more than 10% of its value in the first month after it leaves the lot, according to Carfax. You will lose 20% the first year and 60% the fifth year. With a lower monthly payment, you have an increased risk of owing more than your car is worth, which means that if you want to sell the vehicle or have it totaled, you will have to pay the difference out of pocket.
- Fix the problems. The older the car, the more expensive the repairs. If you go for 84-month financing, there’s a much better chance you’ll have to shell out for these repairs while you still have a monthly payment. If you are on a tight budget and have low emergency reserves, this could be a problem.
- Warranty expired. Many new cars come with warranties that last at least three years or 36,000 miles. With an 84-month loan, you’ll still pay off your car long after the warranty ends. Try to avoid an auto loan term that exceeds your car’s warranty term.
Alternatives to an 84-month auto loan
Whether you want to use a longer auto loan term to buy a more expensive car or just to reduce your monthly expenses, use a auto loan calculator to get an idea of ââwhat it will cost you. If you’re not sure if a long term is right for you – even with the best 84 months auto loan rate – 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 bit so that you can rack up enough money for a larger down payment. Use a automatic deposit calculator to see how much a bigger one will reduce your monthly payment.
- Choose a cheaper car: If you don’t have time to save for a larger down payment, consider changing your expectations with a cheaper vehicle that allows you to finance in the shorter term.
- Find room in your budget: If you haven’t already, take a look at your income and expenses over the past few months and determine if there are any areas where you can cut back to make room for a higher monthly payment that comes with it. a shorter car loan term.
- Rent instead of buying: Leases naturally have shorter terms than auto loans on average – around three years, according to Experian. Despite the short term, however, they charge lower monthly payments because they are based on the vehicle’s depreciation, not its selling price.
Tips for getting the possible short term auto loan
The shorter the term of your auto loan, the better. Not only does this ensure that you pay less interest, but it will also allow you to pay off the debt sooner. This means that you will have that extra money each month to invest in other important things. The best ways to shorten your auto loan include:
- Make room in your budget for the highest monthly payment.
- Choose a more affordable vehicle.
- Donate more money towards the purchase of the car or the trade-in of your current vehicle.
- Negotiate with the dealership to lower the car’s selling price, making payments more affordable.
- Take a longer repayment period at the beginning, then refinance your loan when your budget allows for a higher monthly payment.
- Take the longer term and make additional payments at pay the car earlier than expected.
When considering these and other options, keep your current situation and needs in mind, as well as your long-term goals. There is no one auto loan term that is 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 times when you need a car sooner rather than later, or you may not have much leeway to negotiate with a car dealership. When you have limited choices, a long term auto loan may be the only option. Here are some examples where a long-term car loan might be right for you:
- You need reliable transportation to get to work, school or daycare.
- Your credit needs some work.
- There is no penalty if the auto loan is paid off early.
- The length of the term allows you to afford a better and more reliable vehicle than the one you owned or envisioned before.
- Your car has a long warranty, which minimizes the overall repair costs in the long run.
- You can benefit from a low interest rate and want to invest the difference for a better return on your money.
The bottom line
While you may have smaller monthly payments with an 84-month auto loan, you will ultimately pay more interest. You also risk owing more on the loan than the value of your car, as well as paying potentially large repair bills on top of your car bill. Before choosing a longer auto loan term, be sure to consider how the cost could affect your budget and financial goals.