On the surface, cheap monthly car loan payments seem like a fantastic idea, but there’s a catch. To make car loans more affordable for the average Canadian consumer, lenders have created extended auto loans that can be as long as 84-months. However, the longer the loan term is the more the overall cost.
While your payments are spread out thereby making the monthly payments more affordable, you’re putting money into an asset that loses value at a rapid rate. To learn more about the catch with 84-month car loans as well as alternatives, keep reading.
84-Months Car Loan: The Good
More often than not, it is unwise to sign up for an auto loan with 84 months. Although, there are instances where a car loan with 84 months could benefit you. To start, let’s look at the advantages of an 84-months auto loan.
84-Months Car Loans Have Small Monthly Payments
With an 84-month-long auto loan, your payments will be lower than a car loan with a shorter term. These small monthly payments can be easier to fit into your budget. Your month-to-month costs will be more affordable in the short run.
If you have existing debt that you’re paying down, you may not be able to afford to add on another large payment every month. However, most consumers need cars for work and life, so avoiding a car loan may not be an option. In this case, smaller monthly loan payments would work well on top of existing debt payments.
84-Months Car Loans Can Help You Afford The Best Car
If you have your eye on the newest car with all the bells and whistles, 84-month car loans may be the only way you can afford to make the purchase. If it’s important to you to have that car, an 84-month loan might be right for you.
84-Months Car Loan: The Bad
Now that we know the benefits that come with an 84-month auto loan, let’s consider the negatives. Below is a list of all the disadvantages that come with 84-month auto loans.
Negative Equity On 84-Months Car Loans
While a long loan term might give you more time to repay your car loan and possibly reduce your monthly payments, it can lead to negative equity.
Having negative equity means that you owe more on your car loan than what the vehicle is valued at. For instance, if your car is currently worth $15,000 and you still have an outstanding loan balance of $18,000, you have $3,000 in negative equity.
By stretching out your term, your car’s value may drop quite a bit, while your outstanding car loan may still be high. And if your car depreciates to a value that’s less than what you still owe on your loan, you’ll be in negative equity territory.
The rapid negative equity status is attributable to the quick depreciation rates of cars. It’s best to have short repayment terms to keep your equity positive. With a few rare exceptions, cars never increase in value over time.
84-Months Car Loans Have Higher Interest Costs
The interest rate you are charged on your car loan plays a key role in how much your loan will cost you over the long run. A longer loan term will impact your interest costs in a couple of ways:
- Higher Rates – Many lenders are more willing to offer a lower interest rate on shorter-term loans because there’s a lower risk of loan default. During a shorter loan term, you’ll have less time to default on your loan. But with a longer loan term, you have more opportunities to become delinquent. As such, your lender may charge a higher interest rate to offset this risk.
- More Interest Paid Over Term – Even with the exact same interest rate and loan amount, a long-term loan will come with much higher interest costs than a short-term loan. The interest on a loan with an extended term will accrue over a longer time period compared to a loan with a short term.
To illustrate, let’s compare the interest costs on an 84-month car loan versus a 48- and 60-month car loan, each with a loan amount of $20,000 and a rate of 5%:
|48-Month Car Loan||60-Month Car Loan||84-Month Car Loan|
|Total Interest Costs||$2,108.12||$2,645.48||$3,744.97|
|Total Car Loan Cost||$22,108.12||$22,645.48||$23,744.97|
Payments On An Old Car
To put things into perspective, 84 months is equivalent to 7 years. Some cars, especially used cars, won’t last 7 years. If they do, they’ll be old and clunky, yet you’ll still be making payments on that car with an 84-month auto loan.
Not only will you continue to make payments years into your car loan, but you’ll likely be stuck paying for more frequent repairs and added maintenance as your car ages. For instance, the chances of needing new brakes, new transmission, and engine repairs are pretty higher the older your car gets.
You’ll need to consider whether you can continue to afford your car payments, in addition to these expensive and sometimes unexpected repair costs years into your loan.
Repairs And Maintenance
Older cars require more repairs and maintenance. It is ideal to have your car loan paid off by the time expensive repairs and maintenance are needed for your car. There also is no such thing as an 84-month warranty so the manufacturer can’t help you out when your car starts to age.
Upside Down Loan
Being “upside down” on your loan is the same thing as having negative equity: you owe more on your car loan than what the vehicle is worth. If you find yourself in this situation, you’ll be dealing with serious financial issues in the event of a total loss car accident.
If your car is totalled, you may still be required to repay your existing car loan, even if you can’t drive the vehicle.
Change In Your Financial Situation
An 84-month loan is a long commitment. If your financial situation changed within that time frame, it could jeopardize your ability to continue paying your car loan. This, in turn, can lead to missed payments which can affect your credit and even lead to vehicle repossession.
If your lender or car dealer mentions an 84-month loan, it’s probably because you’re looking at a very expensive, top-of-the-line, brand-new car. Chances are, the car you want is out of your reasonable price range and more than you can comfortably afford.
How To Choose A Car Loan Term?
Follow these steps to help you determine the best loan term for you:
- Review your budget to see how much money you have leftover after all bills are paid.
- Use a car loan affordability calculator when shopping for a car.
- Get pre-approved for a car loan to find out what you qualify for.
- Use an online loan aggregator to compare loan offers from different lenders.
Should You Choose An 84-Months Long Car Loan?
For the most part, an 84-month car loan should be avoided. It’ll end up costing you more over the long run and make you more vulnerable to having negative equity.
That said, there may be some cases in which you may consider an 84-month car loan, including the following:
- Monthly payments are lower – Stretching out your car loan over a longer time frame can keep monthly payments low. If that’s the only way for you to afford a car, then an 84-month loan term may be worth considering.
- You have a long warranty – Some car manufacturers offer very long warranties, which gives you a long time period of coverage. In this case, a long-term loan might make sense.
- You qualify for a lower rate – You may be eligible for a low-interest rate if you have good credit. If you can secure a very low rate, then a longer term may be something to think about, as you can put any extra monthly savings towards investments that generate a high return.
- There’s no early payment penalty fee. If there’s no prepayment penalty fee, an 84-months long car loan can be worth it. It will allow you to benefit from both the lower payments of a longer loan term and the ability to become debt-free sooner if you cut the term short.
What To Do If You’re Stuck In An 84-Months Long Auto Loan Term
If you couldn’t resist the glossy car and find yourself stuck in a 84-month loan, don’t panic, there are ways you can get yourself into a better financial situation. First, you should assess the situation and determine if you have negative equity or not. From there, you can use one of the below tactics to get yourself out of the bad loan.
You can refinance your car loan with another car loan or even a personal loan. By refinancing you may get more favourable terms that suit your budget better. Keep in mind that your credit should be in good shape before you try to refinance. Lenders don’t typically refinance unless you’re in a better financial position than when you first applied.
Trade-In Your Car
If your car loan is too long, you could trade-in your car and purchase a new one. Many online lenders like Clutch, will pay off your current car loan and then deduct it from the current offer. For example, if you have a car worth $10,000 and you owe $3,000. Clutch will only subtract the $7,000 from the current car you want to buy.
As such, if the new car you want to finance is $25,000, you’ll only owe $18,000 with the trade-in.
Higher Monthly Payments
The more money you put toward your loan, the faster it will get down to $0. You can either increase the amount you pay each month or increase the frequency of your payments, or both. This is a good tactic to eliminate negative equity as well.
More Affordable Alternative Options To A 84-Months Car Loan
Before making a final decision on a 84-month auto loan, it is wise to consider all the alternatives. When considering your options, be sure to find a balance between the car that you really want and a car that is affordable with your budget.
- Long Loan, Low APR. To make a car loan more affordable with an extended loan term, find one with a low APR. This way you’ll free up money to use elsewhere and won’t break the bank with your car purchase.
- Lease, Don’t Buy. When you lease a car instead of buying, you usually pay less upfront and have lower monthly payments. At the end of the lease, there is often an option to buy the car at the current market value.
- Large Down Payment. To avoid negative equity on a long loan, make a large down payment. In essence, you’re prepaying the depreciation on the car you buy.
- Avoid New Car Models. New cars are very expensive and lose their value rapidly once they’re purchased. Selecting an older model or used car will be easier on your wallet.
84 Months Car Loan FAQs
What’s the longest car loan term you can get?
How should I choose a car loan term length?
How much more will an 84-month loan cost me versus 60 months?
Final Thoughts On Car Loans With 84-Months Terms
At the end of the day, car loans with 84-month-long terms are typically not the best financing choice available. The relatively cheap monthly payments are deceiving since the overall cost will be much more expensive. Not only that, but you don’t want to be stuck in a seven-year loan, especially on an asset that is quickly depreciating in value.
To find an auto loan that suits your budget best and will contribute to a brighter financial future, reach out to Loans Canada today!