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Most car loans span three to six years. Thankfully, more flexible auto financing is available, including loans that can be paid off more quickly as well as loans that stretch across seven to eight years. But is committing to an 84- to 96-month auto loan worth it?
Learn more about the pluses and minuses of extended-term auto loans, who offers them, the advantages and disadvantages of these longer loans, and who should consider them.
Typical car loan terms
Most borrowers today seeking a car loan choose a term that often spans between 36 and 72 months.
“The most commonly chosen term today is 60 months. This offers a nice balance between manageable monthly payments and total interest costs,” says Geoff Cudd, a consumer advocate and owner of FindTheBestCarPrice.com.
Looking for more flexibility? Shorter terms may be available, including 12 to 24 months, as well as longer loan terms that can stretch from 84 to 96 months (seven to eight full years).
Understanding extended-term car loans
These extended-term loans are becoming more common as car prices rise.
“Many lenders offer 84- to 96-month auto loans to accommodate lower monthly payments and make more expensive vehicles accessible to a wider array of buyers,” Cudd continues.
However, it may be more difficult to find a lender willing to offer a loan term lasting seven to eight years.
“Not all lenders offer these longer terms, and while some borrowers choose them nowadays, they are not as prevalent as standard 36- to 72-month loans,” explains personal finance expert Shawn Plummer.
Pros of 84- to 96-month auto loans
Why opt for a car loan that stretches out up to 96 months? The answer is easy: affordability.
“The main selling point of ultra-long loan terms is smaller monthly payments compared to shorter terms,” says personal finance expert Michael Ryan. “For budget-strapped car buyers, those lower payments can be the difference between affording a newer ride or being stuck with a much older, higher-mileage vehicle option.”
A quick math comparison shows the advantages of an 84- to 96-month loan. Assume you want to borrow $25,000 at a 5% fixed interest rate to purchase a new car. If so, here’s what you’d pay:
- 60-month loan: $520 monthly in principal and interest; $6,181 in total interest
- 84-month loan: $406 monthly; $9,061 in total interest
- 96-month loan: $374 monthly; $10,904 in total interest
Crunching the numbers, you’d save a substantial $146 or $114 a month, respectively, by choosing a 96-month or 84-month loan versus 60-month financing.
“Lower monthly payments can make budgeting easier for borrowers with a tighter cash flow,” notes Plummer.
Cons of 84- to 96-month auto loans
But looking more closely at the scenario above, you’d pay $4,723 to $2,880 more in total interest over the life of a 96- or 84-month loan compared to a 60-month loan. That’s a deal killer for many borrowers.
“The longer you stretch your payments, the more interest accrues. That’s throwing away thousands of dollars just for some temporary payment relief,” cautions Ryan.
But the drawbacks don’t stop there, per Ryan. By picking an 84- to 96-month loan:
- You may be charged a higher interest rate. The previous math examples assumed a 5% fixed interest rate for all three options; however, interest rates tend to be higher on these ultra-long loans compared to shorter-term loans. That means paying even more in total interest than the projected sums outlined above.
- You’re almost guaranteed to be “upside down” (or more than the car is worth) for years due to vehicle depreciation, making it difficult to trade in or sell the car early.
- You’ll probably be making payments on an out-of-warranty vehicle for a long time because most bumper-to-bumper warranty coverages only last three years.
- You’ll continue making payments when the vehicle is much older and worth far less than the initial purchase price.
Good candidates for an extended-term auto loan
Worthy prospects for considering an extended-term car loan include those with stable incomes who need lower monthly payments to fit their budget.
“For example, if you have a steady job but a limited monthly budget, you might benefit from lower payments,” says Plummer.
Additionally, only those who plan to keep their vehicle long after the loan is paid off should opt for an 84- to 96-month loan.
“Those who frequently change cars or who can manage higher monthly payments are not good candidates,” Cudd adds.
Others who should steer clear include borrowers whose cash flow or source of income is not stable.
“If your earnings vary greatly or you face potential job instability, the higher total costs and extended commitment of an 84- to 96-month loan could pose significant financial risks,” Plummer warns.
Alternatives To Consider
Instead of committing to an extended-term loan that could prove risky, ponder some substitute choices, the experts agree, including:
- Purchase a less expensive vehicle that will lower your loan amount, making it easier to afford a shorter term.
- Pick a lightly used auto or a certified pre-owned car versus a brand new vehicle, “one that will hold its value better and over a longer period,” advises Ryan.
- Lease a car instead of buying one. “Leasing is a good option for those who enjoy driving new cars every few years,” says Cudd.
- Increase your down payment on the vehicle to lower the amount you need to borrow, thereby decreasing your monthly payment.
- Increase your credit score to qualify for a lower fixed interest rate. You can up your score by making all debt payments on time, not opening any new credit accounts or closing any existing accounts, paying down your account balances, and not maxing out on your credit limits.
- Borrow the necessary funds from a friend, relative, or loved one who agrees to more favorable terms and a lower interest rate.
- Postpone the purchase and salt away more cash so you can afford more reasonable financing terms.
If you’ve already committed to an 84- to 96-month car loan but are having regrets, there’s a way out that could save serious bucks: Refinance the loan.
Case in point: Let’s say you’re 12 months into a 96-month auto loan, meaning you have 84 months left. Your principal balance owed is $25,000 and your fixed interest rate is 7%.
If so, you’re currently paying about $377 monthly and will have $6,695 in total interest yet to be repaid. If you refi to a new 60-month loan at 6% interest, your new monthly payment would be about $483 ($106 more per month); however, you’ll save nearly $2,700 in total interest and pay off the loan two years earlier than scheduled.
Are 84- to 96-month car loans worth it?
The pros concur: Extended-term car loans are best avoided.
“While 84- to 96-month auto loans can provide short-term affordability, the long-term cost and risks are too high for the average buyer. Paying thousands more in interest and being almost guaranteed to have negative equity is a tough bill to swallow,” says Ryan.
Cudd shares those sentiments.
“These loans are generally a bad idea for borrowers due to the higher interest costs and the risks of becoming upside down in the loan,” he suggests. “It’s crucial for borrowers to consider not just the monthly payment but the total cost of ownership when choosing a loan term. Being financially disciplined and opting for shorter loan terms when possible can save a lot of money in the long run.”