Understanding the Pros and Cons of an 84-Month Auto Loan

Car buyers facing the challenges of inflation and high car prices may be exploring various financing options to make ends meet. One such option is the 84-month auto loan. This type of loan allows you to repay the balance over seven years, potentially reducing your monthly car payment and enabling you to afford a more expensive vehicle. However, before committing to an 84-month auto loan, it’s crucial to consider interest rates, total loan costs, and your financial situation. Here’s what you need to know.

Benefits of an 84-Month Auto Loan

Longer-term car loans have gained popularity in recent years. According to Experian’s State of the Automotive Finance Market report from Q3 2022, the majority of new car loans have terms in the 72- to 84-month range. Stretching out your repayment schedule over seven years offers several advantages:

Lower Monthly Payments

Opting for an 84-month auto loan can significantly lower your monthly car payments compared to shorter loan terms, such as three or five years. This reduction in monthly payments can make it possible to purchase a car that might otherwise be beyond your budget.

Higher Loan Amount

Sometimes, a longer-term loan is the only way to ensure you get a quality vehicle without hidden issues. A new or certified pre-owned car may cost more, but an 84-month loan can make the higher amount more manageable by spreading the payments over a longer period.

Early Payoff

Many lenders allow you to pay off your car loan early without additional fees. If your financial situation improves, you can make larger payments over the course of the loan, reducing the high interest costs associated with a seven-year term. Additionally, if you encounter financial difficulties, you can revert to making minimum payments. It’s essential to check the terms and conditions before agreeing to a loan to ensure early payoff is an option.

Drawbacks of an 84-Month Auto Loan

While an 84-month auto loan has its benefits, there are also significant drawbacks to consider. Generally, the longer the loan duration, the more it should be avoided if there are affordable alternatives. Here are a few reasons why an 84-month loan might not be the best choice:

Paying More in Interest

Long-term loans, including 84-month car loans, are usually not cost-efficient due to the total interest paid over the life of the loan. For example, if you buy a $25,000 car with no down payment at 5% interest, the interest over an 84-month loan amounts to $4,681, bringing the total paid to $29,681. In comparison, a similar loan with a 36-month term will have higher monthly payments, but the total interest charge is only $1,974, nearly $3,000 less than the 84-month equivalent.

Car Depreciation

Cars often lose as much as 20% of their value in the first year. If you take out a loan on a brand-new car, the amount you owe may exceed the car’s value over the loan term. This situation, known as negative equity, can be problematic if you decide to sell or trade your car. Additionally, if your car is totaled in an accident, your insurer will only reimburse you for the car’s value, leaving you responsible for the remaining loan balance.

Repair Issues

Most cars come with a basic factory warranty of three years or 36,000 miles, whichever comes first. With a loan lasting longer than 36 months, you may find yourself without a warranty for part of the loan’s duration unless you purchase an extended warranty. Any repairs needed during this period will be out-of-pocket expenses, adding to your monthly financial burden.

Alternatives to an 84-Month Auto Loan

If you’re considering an 84-month loan but have reservations, there are alternatives to explore:

Saving Up

If you don’t urgently need a vehicle, saving for a larger down payment or a shorter loan term can be a wise approach. This strategy can reduce the total interest paid and make the loan more manageable.

Improving Your Credit Score

As your credit score improves, your loan options increase. Long-term loans are often targeted at individuals with limited options due to lower credit scores. Before applying for a loan, consider ways to improve your credit score to access better loan offers with lower interest rates.

Finding a More Affordable Car

If an 84-month loan is the only way to afford a brand-new car, you might want to reconsider. While the allure of a new vehicle is strong, it could lead to financial difficulties in the long run. Shop around for a car that balances price and quality, even if it requires some flexibility.

The Bottom Line

Deciding whether to apply for a loan, especially a long-term one, is a significant decision. Before making a final choice, weigh the pros and cons of different loan terms, including whether an 84-month loan is the best option for you. Preparing for the loan can make a substantial difference in cost. For instance, improving your credit score can help you access a wider range of loan offers at lower interest rates.

At O1ne Mortgage, we understand the complexities of auto loans and are here to help you navigate your options. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. Our team of experts is ready to provide you with the best service and guidance to make your car-buying experience as smooth as possible.