Is an 84 Month Auto Loan Bad?: Let’s Do the Math

Your car is approaching that make or break point, the six-figure mile marker. Every time you hop in your car, you see the odometer inching closer and closer to 100,000 miles. You know that, once it reaches that point, depreciation sets in at a more significant rate with each additional mile you put on the car.

So the following weekend you find yourself in an auto dealership, surrounded by gleaming polished vehicles all with that new car smell when you step in. But as you go over the numbers with the salesman, it becomes clear that the monthly payment on the vehicle is going to be more than you can afford at the moment. However, the salesman has an idea that may solve your problem: an 84-month car loan.

Is an 84-Month Car Loan Bad?

Determining whether it makes sense to take out an extended car loan starts and stops with the interest rates. It’s one thing if you’re going to be paying the same interest rate only for an additional year or two. But it’s an entirely different matter if you’re paying significantly higher interest rates. And that’s what you are guaranteed to find with an 84-month car loan.

Higher Interest Rates

What the car salesman didn’t highlight in his sales pitch was that the longer the loan, the higher the interest rates. Like your car’s 100,000-mile mark, car loans have a similar breaking point when they go further out than 60 months. And just like your car’s depreciation, the breaking point is significant.

You may be able to stretch your loan out to 66 months before seeing the increase. But once you reach anywhere near a 70-month loan, the interest rate can jump swiftly. For example, a loan with a 4% interest rate could increase up to over 6% when the loan approaches six years in length.

Let’s use an example to highlight the heightened interest rate. If you want a car that costs $20,000 and your trade-in is worth $5,000, you’ll be financing $15,000. If you go with a 60-month loan, your monthly payment will be $276.25 before taxes and fees. The total amount you’ll pay for the loan would be $16,575, so your total interest paid would be $1,575.

If you wanted that monthly payment to get down closer to $200, an 84-month loan with 6% interest would have a monthly payment of $219.13. But your total amount paid would increase to $18,406.92, with a total interest paid of $3,406.92.

By going with an 84-month loan, your total interest paid more than doubles.

Longer Debt Cycle

Not only will you be paying more money than you need to, but taking out a loan that long means you’ll be stuck paying it off for the next seven years.

The additional length of the loan also means that, by the time you’re done paying it off, your car will have depreciated by an extra year or two. So when it comes time to repeat the car-buying cycle all over again, your trade-in will be worth less. And not only will it be less valuable, but you will have also sunk more money into repairs and maintenance.

How to Combat Car Payments

But what if you have no choice? You need a new car, and you cannot afford the monthly payments on a shorter-term loan. You still have multiple options at your disposal.

Negotiate a Better Price

Whatever price you have settled on with the car salesman is likely higher than the lowest price they’d sell it for. Before you walk into the dealership, look up the car’s invoice price. This is the price that the dealers pay to acquire their vehicles. You may think that they would never consider selling for less than the invoice price, but while it sounds counterintuitive, it is not uncommon to get as much as 2% below invoice price.

Holding your ground can be the hardest negotiating tactic to learn when stuffed into a car dealership’s office. You’re in their territory, sitting in an uncomfortable plastic chair as the salesman walks back and forth to chat with their manager about the price. They wait you out, and they throw a variety of numbers on a piece of paper to confuse you.

But if you have a game plan, and more importantly, if you stick to it, you can leave that dealership with a steal. Set a max price you are willing to pay. This should be no higher than 3% above the car’s invoice price. Now, set a starting point and a plan of how you’ll negotiate from your starting point to your maximum amount. If you have to offer your max, don’t budge any higher.

Walk out of the dealership if you must. You’ll be surprised at how well it works.

Consider a Lease

We are not going to settle the never-ending debate over whether it’s smarter to lease or buy a car today. But a lease could be the perfect option for you if you find yourself in a difficult situation with the monthly payment. With a lease, there are fewer upfront costs, and your monthly payment should be lower. But the best part about a lease is the shorter period of payments.

Four years from now, rather than worrying about how many miles you’ve already piled up on your car, you can consider another lease. Or maybe you decide the time is right to buy because you have a higher monthly cash flow than you did four years ago. Whichever you choose, the point is that you have the choice.

With an 84-month car loan, your choices evaporate. You are locked into a seven-year-long loan, and that’s not even the worst part. You could easily end up paying more than double the amount of interest on the loan by extending it just two additional years.

Refinance Your Car Loan

If you’re already stuck with an extended car loan, you may not be entirely stuck with it. Check out our article on how to refinance your car loan.

Bottom Line on Extended Car Loans

An 84-month car loan is never a good idea. If leasing a car isn’t your thing, start working on your negotiation skills.

If you want to shop for the best auto loans, look no further.

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