When To Say No To A 84 Month Auto Loan

With the popularity of 84-month auto loans on the rise, people are starting to question the benefits of a 7-year car loan. When you think of an auto loan, the first question most people think of is, can you afford the payment? This is a good start. It is important to be sure that the monthly payment fits into your budget and won’t cause financial hardship. On the other hand, this thinking neglects the other half of the equation: “The total cost of the loan.” The principal of the loan remains the same; it is the price of the car. An 84-month auto loan does not make sense ¹ even if it has lower payments because the longer term of the loan means that you are paying interest for a longer time. Also, potentially paying much more over an 84-month auto loan. The best 84-month auto loan rates are not going to be as good as the best 48-month rates.

When a bank or dealership offers you a loan to finance a car purchase, they need to be worried about the risk of default the risk that you stop paying back the loan at some point. The bank is buying the car and hoping that you pay back the money. Think about the difference between a five-year loan and an 84-month auto loan from the bank’s perspective. They can offer a longer term of the loan with an 84-month car loan, the bank’s money spends an additional two years tied up in the car, with the return uncertain. That is another two years during which you could stop paying back the loan, for whatever reason. The bank needs to charge a higher interest rate on long-term loans to justify tying up their money for that amount of time.

7 Year Auto Loan Example

Let’s imagine that you are seeking a loan for a $16,000 car. You get a quote from the bank on two different loans. One of them is a five-year option with a monthly payment of $301.94 and an interest rate of 5 percent. The other is a seven-year car loan with a monthly payment of $241.80 and an interest rate of 7 percent. This is where a good auto loan calculator helps out.

Which loan is a better deal?

The five-year option has a higher monthly payment of about sixty dollars or about one cup of coffee per day for the month. However, that is not the entire story. When the five-year loan is over, you will have paid a total of $18,116.40 for a car that costs $16,000 and has since accumulated five years of depreciation. Under the 84-month auto loan, you pay $20,284.32 total, and the car has seven years of depreciation before the loan is over. That is over two thousand dollars more. In other words, skipping that one cup of coffee a day saved two thousand dollars and got you out of debt two years faster.

84 Month Auto Loan Equity Trap

When you buy a car with a loan, you have zero equity, you owe exactly as much as the car is worth, less the down payment. However, as soon as you drive the car off the lot, it loses as much as 20 percent of its market value. That means you have negative equity – if you tried to sell the car as soon as you left the dealership, you would not be able to pay off the loan with the money you made from the sale. One of the main reasons car buyers wind up with negative equity is an 84-month car loan.

84 Month Car Loan Depreciation

Depreciation hits cars hard. Taking a shorter loan will allow you to regain equity in the car faster because you pay down the debt faster than the car depreciates. It will not take long to get back to zero equity including the length of the loan, and then positive equity with a five-year loan, as compared to an 84-month auto loan. This is because the seven-year term is slower at cutting down the debt you owe. If you take out a five-year loan and your financial situation changes, you could end up in some financial trouble. You need the longer, lower payments; you can consider getting the car refinanced since you have accumulated some equity, you just pay over a longer period.

Life Changes

Five years is a long time. A 7-year car loan is even longer, and some have extended this to 8 years. What are the odds that you will move or have a kid in five years? Whatever the odds are, they are higher for seven years. The seven-year term is an extra two years’ worth of life events that might make the car you bought unfit for your current situation. Worse, in those additional two years, you might experience a catastrophe that makes it impossible to pay back the loan at all, which can put you at risk for default and ruin your credit.

Two extra years is not just an added risk for the bank; it is an additional risk to you as well. The sooner you get that debt off the books, the better, because it eliminates the threat of default and frees you up to find a new car.

Reselling a Car

You know about depreciation. However, have you thought about it in the context of selling an old car to buy a new one? It might feel odd to think about a car you are buying now as a potential old car, but it will happen. At some point, you will need to purchase another vehicle. The current one will wear down or need to be upgraded or just doesn’t fit your family anymore. When that happens, the length of time you have had your car affects its market value. No amount of proper upkeep will make a seven-year-old car as valuable as a five-year-old one.

84 Month Auto Loan Affects The Resale Value

An 84-month auto loan term commits you to that car for seven years before it is totally yours. That is seven years of wear and tear and potential major repairs. The extra two years affects the resale value of the car negatively. That will make it harder to sell the car and use its value towards a new one. The problem gets worse if you need to sell the vehicle before the end of the loan. Because it will be both less valuable, and the amount of the loan remaining will be larger, relative to a five-year investment. So under a seven-year loan, you will be left with more debt if you need to sell the car prematurely.

The Risk Problem

The two key takeaways for comparing long loans against short ones is that first, an extended loan is a higher debt burden that will wind up costing you more. Second, a longer loan term does not make sense even if it has lower payments because you are paying interest for a longer time and paying more over an 84-month auto loan means more risk. There’s a reason the bank charges more interest for a longer loan. It is a bigger risk to hold a loan for that extra time, no matter how rosy things look now.

Consider the economy. A person needs to keep a job for five years in the current job market to make sure they can make their steady payments every month. Under a seven-year term, they have an additional two years, almost half again as much time where they need to hold onto their jobs. Of course, you do not expect to lose your job. However, there are millions of Americans today who are out of work. They did not expect to lose their jobs, either. It just happened. They might have car payments, too. That is the kind of risk that a short loan minimizes.

Valley Auto Loans is always looking out for our customers. We do not want anyone to bite off more than he or she can chew when it comes to auto loans. We strongly endorse getting short-term loans. Yes, this will make the monthly payment larger, in just about every case. However, that monthly payment is not an indicator of the real burden of the loan. We want to help you recover from your bad credit history. A longer loan doesn’t make any sense for lower payments if you look at the interest you will pay over that time period and you could damage your credit further.

If you cannot find a car for which you can get a five-year loan at an acceptable monthly payment, consider examining less expensive cars or late-model used vehicles. These vehicles can offer significant savings without compromising on features. Remember that 20 percent loss of value on a car as soon as it comes off the lot? You can take advantage of that on the buying side. In any case, think of it this way.

Final Thoughts

The first thought that comes into people’s’ heads when they consider a car loan is “Can I afford the payment?” The real thing you need to consider is “Can I afford the loan?” The payment is a short-term cost. The whole cost of the loan involves much bigger numbers, thousands of dollars just in interest costs hang in the balance. You can probably get a loan for six years without much aggravation or worry, but five would be better, but an 84-month auto loan is a bad choice.