Is an 84-Month Car Loan a Bad Idea?

For many individuals, purchasing a vehicle involves securing a loan, and options like the 84-month car loan have become increasingly prevalent. This longer repayment period raises questions about its financial prudence for consumers. Extending a car loan over such a long duration requires careful consideration of personal circumstances.

Understanding Loan Term Lengths

An 84-month car loan extends vehicle financing over a significantly longer duration than traditional 36- or 60-month terms. This extended term directly impacts the monthly payment amount. Spreading the total loan principal and interest over more months results in smaller individual payments. This reduction in monthly obligation often appears as an attractive benefit, making a more expensive vehicle seem affordable on a monthly budget.

This approach offers financial relief by lowering the monthly cash outflow for car ownership. The perceived benefit of a reduced monthly payment can be a strong motivator for consumers considering a new vehicle purchase. This financial structure allows buyers to acquire vehicles that might otherwise be out of reach with shorter, higher monthly payment terms.

The True Cost of a Longer Loan

While an 84-month loan may offer lower monthly payments, it significantly increases the total interest paid over the loan’s life. Car loans typically use a simple interest calculation, meaning interest accrues daily on the outstanding principal balance. As the loan term stretches, interest has more time to accumulate, leading to a higher overall cost for the vehicle. Extending the repayment period will result in substantially more interest paid compared to a shorter term with the same interest rate.

With a longer loan, a larger portion of early monthly payments is allocated toward interest rather than reducing the principal balance. This means it takes longer to make significant progress on the amount originally borrowed. Even a slight increase in interest rate, or simply extending the term, can add thousands of dollars to the total repayment amount. For instance, a $30,000 car financed at 7% over 60 months costs roughly $5,600 in total interest, while extending that to 84 months increases the total interest paid to approximately $8,800.

Vehicle Value and Loan Balance

Vehicle depreciation is a key consideration with a long loan term. New cars begin to lose value almost immediately. This rapid decline in market value often means that with an 84-month loan, the outstanding loan balance can exceed the car’s actual worth for an extended period.

This situation is commonly referred to as being “underwater” or having negative equity. If an individual needs to sell or trade in the vehicle before the loan is fully repaid, they might discover they owe more than the car is worth. This can create a financial burden, requiring them to pay the difference out-of-pocket or roll the negative equity into a new car loan, further increasing their debt. The extended loan term prolongs the period during which this negative equity is likely to persist, limiting financial flexibility.

Factors to Consider for Your Situation

Before committing to an 84-month car loan, evaluate several personal circumstances. Assess current financial stability and the predictability of future income streams. A long-term commitment like an 84-month loan requires a consistent ability to meet payments over many years.

Consider the expected reliability and longevity of the chosen vehicle, as it needs to remain functional and dependable throughout the extended loan term. The ability to make additional principal payments can help mitigate some of the increased interest costs and reduce the loan term. Understanding long-term plans for car ownership is also beneficial, as an extended loan can restrict flexibility for future vehicle changes or other financial goals.