It’s easy to make an argument for taking out an 84-month car loan. After all, if you need to buy a car, and you love this car — and stretching out the payments for seven years makes your budget more manageable — well, why not?
Besides, plenty of consumers are taking out 84 month car loans. Experian released data earlier this year showing that almost a third of all auto loans in 2015 had payment lengths of 73 to 84 months.
But don’t do it. Eighty-four months is a bad road to travel down.
[See: Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.]
For starters, the math is ugly. You may know the interest is going to be ridiculous, but you really start to see it when you crunch the numbers.
J. David Krekeler, the founding principal of the debtor-creditor law firm Krekeler Strother, S.C., in Madison, Wisconsin, compares a loan paid off in 60 months and 84 months.
He says a $30,000 loan, which will be paid with a 6 percent interest rate over five years, will have monthly payments of $579.98. That same loan paid over seven years will have a $438.26 monthly payment.
While that is a more manageable payment, Krekeler says, “the consumer will have paid more than $2,000 more in total over the life of the loan.” So for this $30,000 car, by stretching it out to 84 months, you’re paying over $36,800.
And, of course, Krekeler’s example assumes that you have pretty good credit. If you have an interest rate of 13.86 percent, which is more in line with someone who has a credit score between 590 and 619, according to industry estimates, that $30,000 car, paid over 84 months, would give you monthly payments of $560. By the time you were done, you would have paid over $47,000.
So the lower your credit score and the higher your interest rate, the more pitiful the math becomes.
[See: 12 Simple Ways to Raise Your Credit Score.]
Consumers are often lured into buying a more expensive car. Imagine you walk onto a car lot with the idea that you’ll spend $19,000 on a car, but the dealer has one for sale for $21,000, says Matt Smith, an editor with CarGurus.com, a car buying and selling website.
Smith says the 84-month payment plan will generally be what the dealer uses to make the numbers work, so the consumer can get that $21,000 car.
The problem? Despite the low monthly payments, “the car is outside your [$19,000] budget,” Smith says. “You’ve committed to not only the extra $2,000 over 24 months of payments but also 24 additional months of interest.”
Seven years is simply too long for a car loan. An awful lot can happen in seven years. That’s almost two presidential terms. In seven years, your first grader will be in middle school. In early 2016, the U.S. Bureau of Labor Statistics noted that the median number of years that wage and salary workers had been with their current employer was 4.2 years, which means that in seven years, you could easily lose your job and be rehired somewhere else (and perhaps lose a job again).
You get the idea. How long do you really think your car will last? It’s true that we’re keeping our cars longer than we used to, now that loans are longer. According to the London-based financial services company IHS Markit, at the end of 2015, the average time a consumer owned a car was 79.3 months, a new record, up 1.5 months from 2014. If it takes you 84 months to pay off your loan, that’s right about the time you’re likely to need another car, which will also have a payment plan. You’re risking that you’re going to have monthly car payments indefinitely.
[See: 10 Easy Ways to Pay Off Debt.]
That may not bother you, but what if you need a new car in only a few years? “An 84-month loan will typically be upside down for the first four years of the loan, where the borrower owes more than the car is worth,” says Timothy Wiedman, a retired associate professor of management and human resources from Doane University in Crete, Nebraska. He also used to teach a personal finance class.
Many consumers are bringing in cars to trade in that have loans that aren’t close to being paid off, according to Matt Tuers, a sales and leasing consultant at Sir Walter Chevrolet in Raleigh, North Carolina.
“What we have been experiencing with consumers who come in three or four years later to trade these vehicles is that they have very little equity accumulated and are upside down in their auto loans,” he says.
Is there ever a good reason to take out an 84-month loan? Maybe. Krekeler, who has worked with many bankrupt consumers, acknowledges that transportation is a necessity for most people, and that if 84 months is the only way to get it, you do what you have to do.
But you should ask yourself, do I need this car? Can I get something else and pay it back more quickly?
And there are always exceptions to any rule. Sarah Corbin, a public relations executive in Chicago, and her husband, Jim, a bank branch manager, opted to take out a $30,000 car loan at 4.8 percent interest for 75 months (not 84 months, but still high; 60 months used to be considered financially reckless, before it became more or less the standard).
The Corbins bought an electric car, a Chevy Volt. They’ll get a tax rebate, and Jim will get a cash incentive from his employer for making a switch to an electric car. They plan on using both sources of revenue to refinance the loan. They’ll also save money every month on gas, though their electric bill will go up.
“My husband was hesitant,” Corbin says of the loan. “He wanted us to make larger monthly payments, but I do the budgeting and that larger number scared me. We had a business about 10 years ago and are just now building our savings back up, and I didn’t want to touch it. I know there is some backward logic on the savings versus higher interest and payments — but my anxiety level is all the logic I need.”
And, hey, at least the loan wasn’t 84 months.
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Buying a Car? Say No to the 84-Month Loan originally appeared on usnews.com
