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As new car prices rise, lenders are offering longer and longer terms for auto loans. While five-year (60-month) loans were once considered lengthy, in the first quarter of 2019, nearly two-thirds of new car loans had longer terms, according to Experian data.
Now, 84-month auto loans are becoming more common. Getting a seven-year auto loan can reduce your monthly payment, but is it a wise move financially? That depends on several factors. Here's what you need to think about before you head to the dealership.
When an 84-Month Car Loan Might Make Sense
Stretching out your repayment schedule over seven years can lower your monthly car payments significantly compared with, say, a three-year or even five-year loan. This can allow you to buy a car that might not otherwise fit your budget (more on that below).
There are a couple scenarios where an 84-month auto loan might make sense:
- If you invest the money you'll save: If taking out a seven-year auto loan saves you $396 a month on your payments compared with a three-year loan (as in the example below), you could put that $396 into an investment whose rate of return outweighs the amount of interest you're paying on the loan. But will you really do that—for seven years? And if you have an extra $396 a month to invest, is keeping your car payment low really a concern?
- If you plan to pay down other high interest debt: If you have $10,000 worth of high interest credit card debt, taking out a seven-year car loan would give you more money to put toward your credit card bill each month. However, you'll have even more money to pay down your credit card debt if you don't buy the car at all or buy a much less costly one (that you could ideally pay for in cash). If you're already having trouble with credit, taking out a new loan probably isn't a wise move.
Reasons an 84-Month Auto Loan Might Not Be the Best Idea
The main reason to avoid an 84-month car loan: You'll pay more interest. Because these loans tend to be targeted at people with less-than-stellar credit, they often carry higher interest rates than three- or five-year loans to begin with. But even if you get a low interest rate, the longer your car loan, the more interest you'll pay over its life.
Suppose you buy a $25,000 car with no down payment at 5.09% interest. Here's how three different loan scenarios pan out:
- 36-month (three-year) loan: Payments are $750/month; you pay $27,010 total ($2,010 in interest) over the life of the loan.
- 60-month (five-year) loan: Payments are $473/month; you pay $28,369 total ($3,369 in interest) over the life of the loan.
- 84-month (seven-year) loan: Payments are $354/month; you pay $29,770 total ($4,770 in interest) over the life of the loan.
If the thought of paying thousands of dollars in additional interest doesn't persuade you to steer clear of 84-month car loans, consider these other reasons to avoid them:
- Car depreciation: A new car loses as much as 20% of its value in the first year. Over the seven years of the loan, your car's value will continue depreciating, possibly to the point where you owe more money than the car is worth. That's called being "upside down" or having negative equity in your car.
Negative equity becomes a real problem if you want to sell your car or trade it in for a newer model. The buyer or dealer will only pay you what the car is worth—so you actually lose money on the deal. If you get into an accident and your car is totaled, the insurer will only reimburse you for the car's value, but you'll still be on the hook for the remainder of the loan.
- Outlasting the warranty: Most new car warranties are good for three to five years. If you have a seven-year auto loan, however, you'll be making car payments for several years after the warranty has run out. Sure, you can pay for an extended warranty—but wasn't the whole point of an 84-month auto loan to keep your costs down? The older your car gets, the more likely it is to need costly maintenance or repairs. Paying for a new transmission while you're still paying for the car itself can be a real kick in the bank account.
- Overextending yourself: An 84-month car loan lets you buy more car than you can really afford—and let's face it: That's not a good thing. If you're eyeing a luxury car, know that they often cost more to operate, maintain and repair, which can cancel out any savings from the lower monthly payment. And if you lose your job, have to take a pay cut or face a major financial setback, you're still stuck with that (seemingly endless) car loan.
How to Get Low Monthly Car Payments
It is possible to buy a car without spending your whole paycheck each month. Here are some ways to lower your monthly car payments that make more financial sense than an 84-month auto loan.
- Improve your credit score. If your credit score isn't high enough to qualify for a lower interest rate on your loan, why not wait to buy a car and work to increase your credit score in the meantime? Devote yourself to paying down debt and making all of your payments on time. In as little as three to six months, you could have a higher credit score and qualify for a better loan.
- Save for a larger down payment. A bigger down payment can help you qualify for better terms on an auto loan. The down payment will also reduce the total amount of money you need to finance, helping to ensure that you don't end up owing more than the car is worth.
- Lease the car. Dealers often advertise appealing lease offers that can help you get the car you want with lower monthly payments than buying. But keep in mind that since you won't own the car at the end of the lease, you'll have nothing to show for the money you spent. You could also face additional costs if you go over the mileage limit. If your credit is poor, leasing a car could be difficult anyway.
- Buy a less expensive model or a used car. If the only way you can afford your dream car is with an 84-month loan, it could turn into a financial nightmare. Set your sights on a less expensive vehicle or look for a late-model used car instead.
When to Refinance Your Car Loan
Have you already taken out an 84-month auto loan? If interest rates have dropped or if your credit score has risen since you got the loan, you may be able to refinance and get better interest rates. Get your FICO® Score☉ for free from Experian to see where you stand. Then contact banks, credit unions and online lenders to see what interest rates they're offering for auto refinance loans.
Even if you had bad credit when you bought your car, paying your bills on time, monitoring your credit and paying down debt can all help boost your score relatively quickly. Get the details on how to improve your credit score and how to refinance a car loan. (Don't wait too long to refinance; in general, lenders prefer to refinance loans for cars under 5 years old.)
The Bottom Line
If you're looking longingly at pricey new cars, an 84-month car loan may seem like the answer to your prayers. However, the tradeoff of lower monthly payments is rarely worth the risk of owing more than your car is worth, being tied to endless car payments or spending more than you can really afford. Instead of getting locked into a seven-year car loan, look for a smarter way to keep your monthly payments down.