84 month auto loans 84 month auto financing loans

Considering an 84-month auto loan for your next vehicle purchase? These extended financing options, which allow you to pay off a car over seven years, have become increasingly common as vehicle prices rise. While a 60-month loan remains a popular choice, a significant portion of buyers now opt for longer terms, including 72 or even 84 months. Understanding the pros and cons of such a long-term commitment is crucial before you sign on the dotted line.

An 84-month auto loan can be a double-edged sword, offering both significant advantages and potential drawbacks. Before committing to a 7-year car loan, it's wise to be fully aware of all the implications. Many people enter into these extended loans without fully understanding the risks, which can lead to financial challenges or even negatively impact your credit rating. Prudence is key.

What Are the Disadvantages of an 84-Month Auto Loan?

While an 84-month auto loan might seem appealing, it's important to understand the potential downsides first.

Increased Liability and Depreciation

The first thing to consider is that you are extending your financial liability for seven years. Given that the average lifespan of a car in America is around 5 and a half years, this extended loan period can have a negative impact on the value of your car relative to your outstanding debt. A new car begins to depreciate the moment it leaves the dealership, often losing about 20% of its value in the first year alone, followed by another 15% in the second year, and so on. As the car's market value significantly decreases over time, your monthly payments (EMI) remain the same. This depreciation means that if you need to sell or trade your car, you might owe more on the loan than the car is worth, especially towards the later years of the loan.

Risk of Negative Equity

Research indicates that the average trade cycle for vehicles in the United States is about 30 months. If you have an 84-month loan and decide to trade in or sell your car within this shorter timeframe, you are highly likely to be "upside down" on your loan, meaning you owe more than the car's current market value. This situation, known as negative equity, can make it difficult to get out of your current car and into a new one without rolling the old debt into the new loan, which can compound your financial burden.

Higher Interest Costs

Generally, financing a car for a longer period, such as 84 months, often results in a higher Annual Percentage Rate (APR). Lenders typically view longer loan terms as carrying greater risk, and they compensate for this by charging a higher interest rate. This means that over the seven-year life of the loan, you will end up paying significantly more in total interest compared to a conventional 60-month loan. When combined with the effects of depreciation, the higher interest costs can make an 84-month loan a much more expensive option overall.

What Are the Benefits of an 84-Month Auto Loan?

Despite the drawbacks, 84-month auto loans can offer advantages in specific situations, particularly in today's market where new car prices continue to rise.

Lower Monthly Payments

One of the biggest advantages of an 84-month loan is the lower monthly payment it offers. Even if the APR is slightly higher, stretching the loan over a longer period significantly reduces your monthly outlay compared to a 60-month or shorter loan. This can be a major benefit if you have your heart set on a more expensive model but need to keep your monthly budget manageable.

Access to Desired Vehicles

As vehicle prices have increased, an 84-month financing option can make a desired car model more accessible. If a particular vehicle's price is beyond your budget with a standard loan term, extending the repayment period can bring the monthly payments down to an affordable level. This trend has been observed by financial institutions; for instance, some banks report that a substantial portion of their auto loans extend beyond 60 months, with a notable percentage reaching 84 months.

Important Considerations Before Committing

If you're considering an 84-month auto loan, keep a few key points in mind to protect your financial well-being.

Vehicle Longevity

Before purchasing, research the car model you are interested in. Ensure it's a current model that is not likely to be phased out within the next five or six years. A vehicle with strong resale value and a reputation for reliability will serve you better over a seven-year loan term.

Affordability

Carefully assess your budget to ensure that the monthly payments are truly affordable for the entire seven-year duration. Life circumstances can change, and a seven-year commitment is a significant financial obligation.

Gap Insurance

Consider purchasing gap insurance. This type of insurance covers the difference between your car's market value and the amount you still owe on your loan if your car is declared a total loss due to an accident or theft. Given the rapid depreciation of new cars and the long term of an 84-month loan, you are more likely to be in a negative equity position, making gap insurance a valuable safeguard.

Ultimately, take the time to study the entire scenario, weigh your options carefully, and make an informed decision that aligns with your financial goals.

Frequently Asked Questions About 84-Month Auto Loans

Why are 84-month auto loans becoming more common?

84-month auto loans are becoming more common primarily due to rising new car prices. Stretching the repayment period over seven years helps reduce monthly payments, making more expensive vehicles accessible to buyers who need to manage their monthly budgets.

How does car depreciation affect an 84-month loan?

Car depreciation significantly impacts 84-month loans because vehicles lose value quickly, especially in the first few years. With a longer loan term, you're more likely to owe more on the loan than the car is worth for a longer period, potentially leading to negative equity if you need to sell or trade the vehicle.

Are interest rates higher on 84-month auto loans?

Generally, yes. Lenders typically view longer loan terms, such as 84 months, as carrying a higher risk. To compensate for this increased risk, they often charge a higher Annual Percentage Rate (APR) compared to shorter-term loans like 60 months, meaning you pay more in total interest over the life of the loan.

What is gap insurance and why is it important for long-term auto loans?

Gap insurance covers the difference between your car's actual cash value (what your standard auto insurance would pay out) and the remaining balance on your loan if your car is totaled or stolen. It's particularly important for 84-month loans because the extended term and rapid depreciation mean you're more likely to owe more than your car is worth, and gap insurance protects you from this financial shortfall.