Have you noticed something strange about advertisements for car loans lately? It turns out that some lenders are now willing to stretch out car loan payments over an astounding 84 months. For those counting, that is seven whole years. Is a seven-year auto loan a good idea, or should you stick with a shorter loan term?
84-Month Auto Loan Benefits
Lower payments are the main advantage of an 84-month auto loan. However, if your interest rate is much higher on an 84-month car loan than it would be on a 60 or 72-month car loan, you may end up with payments that are similar to a shorter-term car loan.
You won't have your money tied up in your car with an 84-month car loan, which some may see as another benefit. If you have a better use for your money, such as investing at a higher rate of return, then extending a car loan to the longest repayment period possible may be attractive. Of course, these two benefits don't come without drawbacks.
84-Month Car Loan Cons
Many car dealers and consumers focus on the car payment when they're buying a new car. Based on that fact, you may be talked into a luxury sedan with a similar car payment using a seven-year loan even if you were originally planning on buying an entry level sedan using a five-year loan. The payments may end up similar on both vehicles, but you'll be making those payments for an extra two years on the luxury sedan. That move may come back to bite you when you are ready to move on to your next car before the seven-year loan is paid off.
You will pay more interest with a longer-term car loan, assuming car loan interest rates are the same or higher than a shorter-term car loan. To calculate how much more you'll pay in interest, compare the total cost of all payments of a shorter-term loan with those of an 84-month loan. The difference in total payments is the additional interest you'll pay for stretching out your car loan payments over a longer period.
You could wind up in a financial bind should your car get totaled. Insurance companies will normally only pay you what the car is worth when you make a claim, even if you owe more. When you use the insurance money to pay off the car loan, if you are underwater on your car, you'll still owe money on the loan and you won't have a car anymore. To prevent this, you may have to carry gap insurance, which will pay off your car loan even if you owe more than your car is worth. This added expense could make the total monthly payments on a longer car loan just as much as the payments would be on a shorter loan, negating the lower payment benefit of an extended repayment period.
Standard three to five year auto loans often come with standard three to five year car warranties for new vehicles. Unfortunately, when you take out a seven-year loan, many car manufacturers don't include a seven-year warranty in the price of the car. If you don't opt to pay for an extended warranty, your car may break down and require an expensive repair while you are still making payments. This double whammy could put you in a bad financial position at a point in time when your car's value has fallen due to depreciation.
Finally, your financial situation may change drastically over the next seven years. Nothing in life is guaranteed. While we all like to think our financial futures will be brighter than our present day realities, not everyone is lucky enough to end up better off in the future. A seven-year car loan is a major commitment when you have no idea what your future holds. If you stretch yourself too thin and a major emergency pops up in year six or seven, you may wish you had just bought a less expensive car and stuck with a shorter loan term. Always estimate your monthly car payment before deciding on the vehicle you want to purchase.
Calculate your monthly auto payment
Alternatives to 84-Month Auto Loans
A lease typically has lower monthly payments than a comparable loan so you can either pay less or afford a better vehicle. That may be enough to sell you on one of these, but they usually work out to be more expensive in the end because you never own your car. It's a bit like renting rather than buying your home. And leases come with their own drawbacks so run your own figures, not forgetting:
- Excess mileage charges if you drive more than average.
- Wear-and-tear costs.
- Maintenance costs if you lease beyond the manufacturer's warranty.
2. Buy Something More Modest
It is easy to get carried away on a dealer's lot, especially when the salesperson starts working his or her magic on the monthly payment figures for your dream car. But, absent one of those rare genuine bargains, you are going to end up paying a whole lot more for a more expensive car, paid down over a longer period. Keep your focus on the overall cost of borrowing, which is the total amount you are going to pay over the lifetime of your loan.
3. Buy Used
Everyone likes that new-car smell and the prestige of driving a factory-fresh vehicle. But the average loan on a used vehicle is more than $10,000 below that for a new one. That is a lot of money for anyone, and especially for someone who is going to be paying interest on it for the next seven years. The average new car loses 11 percent of its value the moment you drive it off the dealer's lot and another 15-25 percent during each of its first five years, according to Edmunds.com. You might want to think about letting somebody else take the big hit on that.
Ways to Tackle Long-Term Auto Loans
If you decide that an 84-month auto loan is your best way forward, you owe it to yourself to get the best deal you possibly can. Here are some ways to make sure you do that:
1. Shop for the Best APR
Many car dealers are notorious for gouging and even scamming their customers over finance. Yours may be a good one, but you still need to be sure you are getting the best possible deal. And that means you must get quotes from multiple auto lenders – plus your bank or credit union – so you can compare offers. Do this before you set foot on a dealer's lot. That way you can resist pressure to sign up for a bad deal.
2. Be Ready to Refinance
There can be many reasons why you should refinance your auto loan. Maybe interest rates have fallen since you signed up for your current loan. Maybe your credit score has improved and you now qualify for a better rate. Maybe your finances have gotten better and you can afford the higher monthly payments that come with a shorter (and thus cheaper) loan. Maybe you can afford a bigger down payment and save that way (see below). Or maybe you just want to get out of a bad deal your dealer pushed you into. Whatever your reason, the LendingTree auto refinance calculator is your friend because it can help you see how much you stand to save. Use it often!
3. Make a Bigger Down Payment Than You Planned
Whether you are getting a new auto loan or refinancing an existing one, a bigger down payment can save you serious money. That is because it might entitle you to a lower interest rate, as well as improve your chances of getting approved for a great deal. It will also reduce the risk of your loan going "underwater" (you owe more on the vehicle than it is worth), which could be important if your car is stolen or totaled and you do not have gap insurance. You will also reduce your overall borrowing, which could have a good effect on your debt-to-income ratio when you next apply for a mortgage or home refinance.
Make a Smart Decision for Your Situation
Extended car loans, such as the 84-month loan, are a relatively new loan product. These loans offer lower payments over an extended period, which allows some consumers to buy more expensive vehicles they could not otherwise afford.
Make sure you've carefully considered all of your loan options when buying a vehicle so you can choose the loan term that fits your needs best. Don't forget to shop around to find the best deals, including the best interest rates, on your future auto loans.