Why You Shouldn’t Take Out an 84-Month Auto Loan

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Updated on Saturday, August 29, 2020

If high monthly payments keep you from buying the car you want, you may be tempted to lower your payments by signing up for a 72-, 84- or even 96-month term loan.

While financing with an 84-month auto loan can lead to a lower monthly payment, you should be aware of the risks. Depending on your financial situation, it could be a way to get the vehicle you want, but you could pay more than you planned.

Many auto lenders, including banks, credit unions and online lenders, offer 84-month financing. Be sure you know what’s at stake before you sign up for a loan term that long.

6 reasons an 84-month auto loan is a bad idea

Many financial experts say an 84-month auto loan is a bad idea. You will pay more for the car than you would with a shorter loan even though the monthly payments will be less than the shorter loan term. According to Edmunds, nearly 70% of new car loans in the first half of 2020 were longer than 60 months, with the average loan term hitting 70.6 months.

That’s due in large part to the rising cost of vehicles. According to Kelley Blue Book, the average transaction price of a new car has risen to $38,378, and popular vehicles, such as crossover SUVs and pickup trucks can be even more.

1. Higher interest charges

Typically, interest rates for an 84-month loan are higher than average car loan interest rates for 60- or 72-month loans. After all, 84 months is 7 years, which is a long time to drive a car.

2. Pay more in interest over the life of the loan

The loan term is longer, so you will pay more in interest for an 84-month loan compared with a shorter term. Overall, the car will cost more to own by the time the loan is paid off.

3. Higher credit score required

Longer-term loans usually require a good credit score, according to Melinda Zabritski, senior director of automotive financial solutions with Experian. Lenders take on more risk with a longer loan, so they want to lend to people who have a track record of paying their bills.

4. Payments may outlast your warranty

Most new-car warranties run 36 months, with some running up to 60 months, or even longer for some components such as the drivetrain. If you keep a car for the full 84 months, you’ll own it after the warranty runs out, which means you’re on the hook for all repair costs.

5. Repair costs

As you drive your vehicle and the miles add up, it’s more likely it will need repairs and maintenance, such as fluid changes, timing belts and other things that require the skills of a mechanic. The higher the mileage ticks, the more likely it is that important components (like transmission and engine) will start to require replacement and significant repair.

“The longer the loan term, the more interest you will pay over the life of the loan and the less money you may be able to set aside in the long run for maintenance and repairs as the vehicle ages,” said Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union.

6. Negative equity

Otherwise known as being upside down, negative equity happens when you owe more than your car is worth. Unless you pony up a substantial down payment, you’ll likely be upside down with an 84-month loan term. That’s because the car’s value will depreciate faster than your paying down the principal of the loan. With a long-term loan, you pay less principal each month, so it takes longer to pay off the balance.

Many people like to get into a new car sooner than 84 months. So they’re stuck with a car or truck that’s not worth as much as they owe on it when it comes time to trade it in.

3 instances when an 84-month auto loan might make sense

Depending on your situation, an 84-month loan term might make sense. Perhaps you really need a new vehicle to accommodate a changing family situation. Or maybe you’ve relocated to a snowy climate where you need a four-wheel-drive SUV. In some cases, an 84-month loan may be your best option.

1. Affordability

A long loan term may be the only way you can purchase a new vehicle that fits your needs. If you’re trying to make room for a growing family or need to buy a truck for work, there may not be many other options. With a long-term loan, you can make the monthly payments fit your budget. Keep in mind you’ll actually be paying more for the vehicle over time.

2. Other debt needs to be paid down first

Depending on your financial situation, you may have debt with higher interest rates or a more substantial loan balance. You could put the money you’re saving on the car payment toward other loans. “A longer term on your car loan may provide more financial flexibility in your budget by giving you a lower monthly payment,” Pendergast said.

3. Incentive financing

During the COVID-19 shutdowns, some car manufacturers offered 84-month loans at 0% financing. While these terms may seem like a good deal, be aware that it may not be the best deal. If a manufacturer also offers a cashback incentive on the car, it may make more sense to take the incentive, apply it to the down payment and take a loan with a higher interest rate, Zabritski said. That way, you’re financing less principal, which can keep the payment down but may also cost less in interest.

A Tale of 3 Auto Loans
Purchase PriceLoan TermAPRTotal Interest Paid*
$25,00060 months8.21%$5,566
$25,00072 months8.21%$6,745
$25,00084 months8.21%$7,951
Total savings by using a 60-month loan term$2,385

*Does not include down payment, tax, title and registration fees. Based on a credit score of 680+.

Adding tax, title and registration to the loan amount will increase the amount of interest you pay. If you make a down payment or have a trade-in, the amount you borrow will go down.

How to make the most of a long-term auto loan

If you must get an 84-month auto loan, there are some steps you can take to make the most of it.

Compare rates

Usually, interest rates are slightly higher for 84-month terms compared with 60- and 72-month terms. Compare rates and use an auto loan calculator to crunch the numbers. A shorter-term rate with a lower interest rate will mean a higher monthly payment but lower overall cost. Shop around for interest rates and get multiple offers from lenders to compare.

Buy now, make extra payments

You could make additional payments to pay the loan off early or build up equity. If you’re buying a vehicle at the average price of $38,378, an 84-month loan would be $602.19 per month, and you’d pay $12,206 in interest. If you pay an extra $100 per month, you could save $2,298 in interest and own the car in just over five years instead of seven years.

Buy now, refinance later

You drive off the lot with the car you want now with an 84-month loan. If your financial situation improves, you could refinance for a shorter term to save on interest.

Make a large down payment

You could pay 20% or more of the purchase price upfront. That reduces the amount you borrow. However, you should also avoid financing fees such as taxes, registration and dealer fees, and add-ons such as the dealer’s paint protection coating or vehicle service plan.

When you put more down on your vehicle, you’re less likely to become upside down, and you may be able to avoid guaranteed auto protection or GAP insurance. GAP insurance covers the difference between the loan balance and the car’s value in the event the car is a total loss.

Buy used

You can reduce the amount you borrow by buying a used car that costs less than a new one. According to Experian, the average payment for a used vehicle is $391 compared with $554 for a new one. You can save some money and have a more affordable payment if you choose to buy a used vehicle. There are however, some trade-offs to buying used, too. There are some 0% and other low-rate financing deals available for used cars at shorter terms, such as 36 months that could reduce your payment if you qualify.

Understanding the auto loan process

Most people go shopping for a car and find one they like before they think about financing. That’s backward. You’re more likely to fall for dealership sales tactics and buy a more expensive car than you can afford when you shop this way.

Instead, get preapproved for a loan with a bank, credit union or online lender. The dealer may have lenders that can help you get preapproved before you select your car.

With a preapproval, you’ll know how much you can borrow to pay for the car and what the monthly payment would be. You’ll have a loan amount and interest rate that you can use to compare with the financing options from the dealer and other lenders. You’ll be prepared to make an informed decision when you find the car you want.

Lenders look for a high credit score for an 84-month loan term, so check to see what your credit might be before applying. That way you’ll know which lenders might give you preapproval.

How to get preapproved for an auto loan

With just a little preparation, you can get preapproved by a bank, credit union or online lender. You can research rates online to get an idea of what’s being offered in the market. Lenders will use your creditworthiness to determine the interest rate they will offer you. Keep in mind that the credit score for an auto loan is a little different from other loans.

1. Gather your documents

Get your information together before you visit a lender or apply online. You’ll need documentation like:

  • Personal information, including name, address, phone number and Social Security number.
  • Employment Information, such as your employer’s name and address, your job title and salary, and length of employment.
  • Financial information, including your current debts, your living situation, what kind of credit you have available and your credit score.
  • Loan information, including the amount you expect to finance and the length of the loan term you want, as well as any trade-in or down payment information.

2. Apply

Armed with your documents, apply for your auto loan online and in-person with a few different lenders. Shop around for the best auto loan rates. If you’re shopping for a car, multiple credit inquiries made within 14 to 45 days won’t hurt your credit score any more than a single inquiry would.

3. Shop with your preapproval

If you’re successful in getting preapproved, you’ll receive a loan quote that shows much you qualify for, the interest rate and the length of the loan. You can use this information when you go shopping at the dealer. You’ll know how much you can afford to spend on the car. And you’ll be able to compare financing offers.

4. Consider a cosigner

If you have less than good credit, a cosigner could help you qualify for a loan that you may not be able to get on your own. Using a cosigner with a good credit score could help you qualify for a lower interest rate as well.

Keep in mind the cosigner is responsible for paying the loan if you don’t pay it. That could negatively affect their credit score as well as yours. If the cosigner is a friend or family member, make sure they’re aware of their commitment to the loan.

Auto loan contract traps

Be aware of a few financing traps dealers may use while you’re shopping for a car. If you can recognize what the dealer is doing, you can avoid paying more than you planned.

Paying too much for the car

Research the manufacturer’s suggested retail price (MSRP) of the vehicle you’re looking at, and any incentives that may be available. The sticker price can vary by trim levels and options, so research the options you want. Many cars sell below sticker or MSRP except for a few high-demand models. Be wary of dealer add-ons that are often presented at the final stage of negotiation, such as:

  • Nitrogen in the tires
  • Upholstery and paint protection packages
  • Vehicle service contracts
  • Window tinting
  • Window vehicle identification number (VIN) etching packages

Taking too little for your trade-in

Research your car’s value on sites like Kelley Blue Book and Edmunds to see the market price for a trade-in in your area. If you still owe money on the car, and especially if you owe more than the car is worth, you could have less negotiating power.

Focusing on monthly payment

Don’t lose sight of how much the car will cost you through the life of the loan. That’s where the 84-month loan term may look attractive but could cost you several thousand dollars on a new car. Look at the total cost of the purchase price plus the total amount of interest before you settle on a loan term.

Ignoring your budget

This where the loan preapproval will help keep you on track. Have a good sense of how much you can borrow and how much you can afford to pay each month considering your other obligations.

When it makes sense to lease vs. buy a car

Leasing can be a good alternative to a longer loan term. You could drive the same car for a lower monthly payment, although leases are typically 36 to 37 months. Before you lease, understand the pros and cons compared with buying a car. An increasing number of people are turning to leasing for their new vehicles, according to Experian.

One of the reasons is the average new lease payment is $466, while the average monthly payment for a new loan is $569, Zabritski said.

Pros and Cons of Leasing vs. Buying a Car
Monthly payment Payments on a lease are $100 less on average compared to buying, according to Experian.Payments are more for a loan, but once it's paid off, you own the car.
Warranty coverageDuring the average lease of 36 months, your car will be under full warranty coverage.You can purchase extended warranties or vehicle service contracts. Otherwise, you're responsible for maintenance costs.
Financing term You can move to a new vehicle at the end of the 36-month lease instead of being locked into a long-term car loan.At the end of the loan, you can sell, trade in or keep the car.
MileageLeases typically allow 10,000-15,000 miles per year, and you'll pay more for additional miles, either upfront or at the end of the lease.Unlimited miles when you own the car.
Wear-and-tear feesYou'll pay extra for upholstery stains, paint scratches, dents, and wear and tear above the normal when you turn the car in.Wear and tear could lower the resale or trade-in value.
ValueThe value of the car is set at the end of the lease and barring high mileage or excessive wear-and-tear, it shouldn’t change.The car’s value may not be as much as you owe on it and can continue to depreciate as the car ages.

FAQs about 84-month auto loans

Depending on your credit score and other factors, interest rates on car loans vary from low manufacturer incentives of 0% up to the maximum allowed interest rate in your state. The average rate for new-car buyers is 5.61% while used car buyers pay an average 9.65%, according to Experian.

You can usually finance a new car for 24 months up to 96 months or eight years. The average loan term is 70.6 months.

Used cars can usually be financed up to 72 months, although it can depend on the age and mileage of the car.