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Auto loans typically have terms ranging from 24 months to 84 months, or two to seven years, which determines your monthly payment amount and interest charges. With a shorter term loan, you will pay more per month, but you will owe less interest over the life of the loan. Longer-term loans, such as an 84-month car loan, offer smaller monthly payments that result in higher interest charges.
While the majority of auto loan borrowers take out loans for 60 months or five years, the best term for you is what you can afford. For example, if you need a car but can only afford lower monthly payments, an 84-month auto loan might be right for you. Before taking out a longer-term loan, such as an 84-month auto loan, understand how it works to decide if it is right for you.
What is an 84 month auto loan?
An 84 month auto loan is a seven year loan. While three- and five-year auto loans were the most common for buyers in previous years, there is an upward trend in long-term auto financing. For example, in 2019, over 18% of loan terms were 84 months or longer – that number rose to almost 21% in 2020, and it now exceeds 22%.
How an 84-month auto loan works
When you take out an auto loan, you have a fixed repayment period, including interest and fees. An 84-month auto loan means you pay the same fixed interest rate and the same monthly payment for 84 consecutive months. Some borrowers may want to prepay their loan; however, sometimes lenders charge a prepayment penalty, so be sure to check with your lender before doing so.
When an 84-month auto loan is a good option
An 84-month loan is a good idea if you:
- Need a car immediately. If you need a car right away, you may not have the cash to make a large down payment that will translate into affordable monthly payments on a shorter term loan. Longer loan terms, and therefore lower monthly payments, could be the difference between buying a car and not.
- Cannot afford larger payments. Many dealerships have little or no down payment requirements, but that means larger monthly payments on a shorter term loan. If you don’t think you can make larger monthly payments with shorter terms, consider an 84-month loan.
- Have other monthly debts to pay off. Longer loan terms mean lower monthly payments, giving you the flexibility to pay off other debts at the same time. You might have credit card bills, medical bills, or other unpaid debts that also need your attention.
Disadvantages of an 84 month auto loan
There are downsides to an 84-month auto loan, including:
- Pay more interest. The longer the term of your loan, the more interest you will pay over the term of the loan compared to shorter loan terms, even if you have the same interest rate.
- Become upside down on the car. By the end of the seventh year, your car would have depreciated considerably. If you want to trade it in for a new car or even sell it privately, you’ll get a lot less than what you originally paid for.
- Maintenance of repairs. Some older cars need more attention than others. You may need major repairs on a car that you are still reimbursing more than five years after buying it. It’s easier to justify maintenance repairs on older cars you own for free.
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Choose long-term or short-term auto loans
Shorter terms mean higher monthly payments. But the faster you pay off your car, the faster you own it. If you can afford an auto loan shorter than 84 months, you should.
Here is how the total interest paid and monthly payment for a $ 25,000 car with an interest rate of 3% and no down payment fluctuates depending on the length of the loan.
In this example, an 84-month loan shows $ 1,575 in interest over 36 months. Longer loan terms make sense if you need to keep your payments low enough that you can afford them. But remember how much you will pay in additional interest if you go for longer terms.
Alternatives to an 84 month loan
If you can’t afford shorter loan terms and / or don’t want to take out an 84-month loan, consider:
- Save for a big down payment. The higher your down payment, the lower your monthly payments. It’s not always easy or feasible to afford large monthly payments, so the more you save up front for a down payment, the less you’ll have to pay each month.
- Find a cheaper car. It is important to use your budget as a guide. You can have a maximum monthly payment, but staying below is always a good thing if possible. Instead, find a cheaper car that meets all of your needs. You can take out a smaller loan and possibly afford shorter repayment terms.
- Rent instead of buying. Leases are short-term, typically 24 to 48 months, and typically have low or no down payments. Payments are usually lower because they are based on the depreciation of the car when you drive it, not the purchase price.