On the surface, a long loan seems like a great idea but those perks don’t always make great financial sense. In this post, we’re discussing the logistics surrounding a 84-month auto loan, which more and more Canadians are opting for.
In this post, we cover:
Pros and cons of an 84-month auto loan
While you can’t choose the size of your loan, you can choose how long it takes to pay it off. Long-term car loans are becoming more popular, with more than half of all new car buyers financing the purchase for 84-months, resulting in a 7 year car loan or longer, according to J.D. Power Canada.
But do the selling points outweigh the risks?
Pros of 84-month auto loan financing
- Lower monthly payments: This is the main reason people choose extended financing terms. When you spread a loan out over a longer time, the amount you pay each month goes down.
- You can afford a more expensive car: While a $40,000 vehicle might be out of your budget with a standard 48-month loan, a longer financing term can make the monthly payments more manageable. Our car loan calculator is a great way to visualize the effect loan term has on monthly payments. For example, the projected payment for a $40,000 at 48-months is about $940, but at 72-months it’s closer to $660.
- You’ll have less money tied up in a car loan: With lower monthly car loan payments you’ll have more money left over to spend on other things.
Cons of 84-month auto loan financing
- You’ll pay more in interest: Long-term loans almost always come with a higher interest rates than short-term loans because they carry a higher risk of defaulting. But even if the interest rate is the same as a 36- or 48-month loan, you’ll end up paying more in interest because of the additional monthly payments.
- You run the risk of getting “upside down”: Because new vehicles depreciate quickly, many new car owners end up owing more on their loan than the vehicle is worth — this is called being “upside down” or having negative equity on your car. A long-term loan means you’ll be upside down for longer and run the risk of losing money if your car gets totaled in an accident or you want to sell before the loan is up.
- Your warranty will probably run out: The average new vehicle comes with a warranty that covers repairs for the first 3 years or 36,000 kilometres of its life. Unless you buy extended warranty you could wind up with expensive repairs on top of your monthly payments if your car breaking down while you’re still paying off your loan.
- Your financial situation could change: Seven years is a long time. While everyone hopes to be making more money down the road, there’s no guarantee what your financial situation will be in the future.
Alternatives to long-term financing
An 84-month car loan isn’t the only way forward if you have a limited monthly budget. Here are a couple ways to make your car payments more affordable:
Buy a less expensive vehicle
The cheaper the car, the less you’ll have to borrow. It’s easy to get caught up in the excitement of car shopping, but stick with what you can afford and even consider spending less than you’ve budgeted for. Your bank account will thank you.
Shop for a used car
Buying a pre-loved vehicle is a great way to save money upfront. However, keep in mind that you might need to spend more on maintenance and repairs for an older car.
How to manage an 84-month loan if you’re already locked in
If you’ve already committed to a long-term loan, there are ways to mitigate some of the risks:
- Refinancing allows you to renegotiate nearly every part of your 84-month car loan, including the financing term, before it’s paid off.
- Making extra payments means you’ll be be able to pay off your loan faster — but make sure your car loan doesn’t have early payment penalties.
- To offset the reality of going “upside down” on your loan you should consider buying gap insurance. This covers the difference between what the car is worth and what you owe.
Making the best choice for your budget
The allure of lower monthly payments has made long-term car loans more popular. But is an new car loan rates 84 months worth it? Financing your car loan for longer usually means paying more in interest, getting stuck with negative equity and having loan payments long after your vehicle’s warranty is up.
You should always weigh the pros and cons of loan terms before picking the option that’s best for you.
Birchwood Credit Solutions offers car loans with a wide variety of financing lengths. Our friendly Finance Managers will work with you to find the term that fits your budget. Give us a call today or fill out an online application to get the ball rolling on your next car.