Should you get an 84-month auto loan?

Couple shopping for a car and looking over terms with the dealerImage: Couple shopping for a car and looking over terms with the dealer

In a Nutshell

If you’re shopping for a new or used car, you may consider taking out an 84-month auto loan, which is a term of seven years. Before you go this route though, you should understand why this kind of loan can be risky — and whether alternative financing might be a better option.
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An 84-month auto loan can mean lower monthly payments than you’d get with a shorter-term loan. But having as long as seven years to pay off your car isn’t necessarily a good idea.

You can find a number of lenders that offer auto loans over an 84-month period — and some for even longer. But before you take out an 84-month auto loan, you should understand the potential risks and alternatives.

We’ll go over the pros and cons of seven-year auto financing to help you decide if it’s right for you.

When to consider an 84-month auto loan

While 84-month auto loans generally don’t make great financial sense, there are some instances when they might be a good option. Here are a couple.

If you need a smaller monthly payment

If you need a car, an 84-month auto loan may leave you with lower, more manageable monthly payments and make your purchase seem more affordable than they would with a shorter-term loan.

But if you don’t have the money to pay for a particular vehicle without stretching your car payments across seven years, you should ask yourself whether you can really afford the car you’d like to buy.

You may want to pick another vehicle that better fits your budget or save money for a larger down payment so you won’t have to borrow as much.

If you want to pay off more-expensive debt

Another instance that may warrant an 84-month auto loan is if you have other debt at higher interest rates than your potential auto loan. You might want a lower car payment so that you’ll have more money at your disposal each month to pay down that other higher-interest debt, which could potentially save you money in the long run.

An 84-month auto loan may allow you to save extra money that can be used to pay down your higher-interest debt. For example, if you finance a $20,000 car over a five-year term at a 4.5% annual percentage rate, with no down payment (and not including any taxes or other fees), your monthly payments would be $372.86. If everything remained the same yet you chose a seven-year term, you’d pay $278, or about $95 less per month.

Let’s say you owe $15,000 on your credit card with a 25% APR. You could use that extra $95 a month to pay toward your credit card balance and potentially save on overall interest for your debts.

Risks of an 84-month car loan

The truth is that applying for an 84-month car loan can be pretty risky. Consider these scenarios before you make a decision.

You’ll likely pay more interest

A longer car loan term usually means paying more in interest over the life of the loan.

Let’s say your loan amount is $20,000, with a 4.5% interest rate, excluding sales tax and fees. This is what the difference looks like.

Car price Interest rate Loan term Interest paid
$20,000 4.5% 60 months $2,371.60
$20,000 4.5% 84 months $3,352

Ultimately, you’d pay about $980 more in interest for the longer car loan.

If you have the money, paying back an 84-month auto loan early can help you save on the total amount of interest you’ll pay. But some lenders charge prepayment penalties (fees for paying off all or some of a loan early), so if you’re thinking of going this route, check the terms of your loan agreement.

You may owe more than your car is worth

Since a new car starts losing value the moment you drive it off the lot, an 84-month auto car loan can also put you at higher risk of going upside down on your loan.

That means you may end up with negative equity — owing more than your car is worth. In that case, if you want or need to sell your car before it’s paid off, you may not break even, much less turn a profit.

And if your car gets totaled in an accident before it’s paid off, the insurer (depending on your policy) may only cover the book value of the car — very possibly an amount less than what you owe. Even if the car isn’t drivable, you could still be responsible for making the monthly payments until it’s paid off.

You may need repairs while you still have a loan

You may also have to pay for repairs at some point while paying down your seven-year loan. This is because many new cars come with basic warranties that span four to five years and powertrain warranties that last five or six years. If your warranty expires before you pay off your car and something goes wrong, you may need to pay for those repairs on top of your car payment.

That said, many people do choose longer loans. For example, 42.2% of used-car shoppers took out 61- to 72-month loans, while 18.1% extended their terms between 73 and 84 months, according to 2018 data from the credit bureau Experian.

If you bought a 5-year-old car with an 84-month loan, your car would be 12 years old and could need some sort of repairs by the time you paid it off.

Alternatives to an 84-month car loan

There are a number of alternatives to 84-month car loans that could help you save money in the long run. Let’s take a closer look at some of them.

  • Lease a car. If you’re thinking about taking out an 84-month car loan because you’d like lower monthly payments, leasing from a car dealer could be the way to go. Since lease payments are based on a car’s depreciation during the time you’re driving it instead of the purchase price, leasing may come with lower monthly payments.
  • Select a more affordable used car. It may be tempting to take out an 84-month loan for your brand-new dream car — but if that means big financial hardship, you should consider a used car that costs less.
  • Save for a larger down payment. The more money you put down on a car, the less you’ll have to finance and the lower your monthly loan payments may be. Taking the time to save for a larger down payment could allow you to take out a shorter loan term and still enjoy lower monthly payments.

Next steps

If you’re asking yourself whether getting an 84-month auto loan is a good idea, consider all of the financial risks involved. You’ll likely have to pay more interest over the life of your loan, and you could still be paying for the car if major repairs are needed or an accident happens down the road.

Before you apply for an 84-month auto loan, think about how it may affect your financial future and be sure to consider the alternatives.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.