Don't Rush Into an 84-Month Car Loan

Long loans can lower your monthly payment, but you'll end up paying more

Illustration of a car sitting on top of a pile of paperwork. Illustration: iStock

Finding a new car can be tricky in the current market. Production delays caused by the global semiconductor shortage have caused shortages on dealership lots. Even so, there are still financing offers out there, and low-interest financing on long-term auto loans has quickly become the norm. But before you go out and sign on to a six- or seven-year commitment on a new car, even at a very low percentage rate, Consumer Reports’ experts advise crunching some numbers.

That’s because some cars depreciate at a faster pace than a loan can be paid down, especially over so many years. That means there could be a period when you owe more than your vehicle is worth, also known as being underwater or upside-down. In the case of an accident that totals the car, that could mean a financial disaster.

Chuck Bell, programs director for advocacy at Consumer Reports, recommends that consumers take a conservative approach to how much they spend on a vehicle.

“In the past, the rule of thumb for car financing was the 20-4-10 rule: Make a 20 percent down payment, take a 48-month [four-year] loan, and spend no more than 10 percent of your budget on all vehicle expenses, including maintenance and insurance,” he says. “Now, many households are spending an average of 11 percent just on car payments alone.”

Being upside-down on an auto loan is fairly common. According to new research from Edmunds, 44 percent of new car sales involve a trade-in with negative equity. While negative equity isn’t necessarily much of a problem while you own the car, it can put you at risk financially if you decide to trade it in or if it is damaged. If a vehicle is declared a total loss in an accident, you will still be liable for the loan balance that insurance doesn’t cover. That’s also the case if you want to sell your vehicle and buy something else: A vehicle often depreciates faster than you can pay down a loan over six or seven years.

More on Car Buying

So why do people take out loans that last longer than many people keep cars? The simple answer is to make it possible to stretch and buy more car.

“Consumers have increasingly been gravitating toward more expensive vehicles, such as trucks and SUVs, so long-term loans may offer a way to offset monthly costs,” says Carolyn Gasbarra, a spokesperson for TransUnion, a credit reporting agency. She also says a general increase in vehicle prices has made affordability a problem for many car shoppers.

“Consumers may also be more receptive to a long-term loan as vehicles are lasting longer on the road,” she says.

According to TrueCar, a CR partner that tracks the auto industry, cars are, in fact, lasting longer than ever before—an average of 12 years. Total-loss accidents notwithstanding, keeping a vehicle paid for with a long-term auto loan for many years could, technically, work out for the consumer. But it’s seldom that simple.

“We know there are layers to vehicle ownership, from people who flip leases on new vehicles to people struggling to afford the payment of a subprime ‘buy here, pay here’ loan on an 8- to 10-year-old vehicle,” says Alain Nana-Sinkam, TrueCar’s vice president of strategic initiatives. Based on TrueCar’s research, most new vehicles that are sold—as opposed to leased—end up being sold again as used cars four or five years later.

Bell says stagnant household incomes and rising vehicle prices have led to a situation where automobile ownership is taking a bigger bite out of people’s monthly budget. And as CR has said before, the cost of car ownership usually exceeds monthly payments on a loan.

“Stretching out the payments doesn’t make the car itself more affordable if you take the longer view,” he says. “It’s sort of like the frog in the pot of lukewarm water that is gradually heating up. You don’t notice the change year over year, but if you step back and look at what is happening to consumer household budgets, you see many people really straining to keep up with the rising costs of vehicle ownership.”

Payment deferrals, while appealing to customers facing employment instability amid economic turmoil, amount to kicking the financial can down the road. Deferral programs delay the onset of financial responsibility by several months as the vehicle continues to depreciate. Nana-Sinkam says that even though a payment deferral delays paying off a loan and can increase the total amount paid, three months isn’t likely to make an alarming difference.

Nana-Sinkam says that a disciplined consumer could use a long-term 0 percent auto loan as a way to free up financial resources for investment (although no-interest loans are no longer common like they were during the early days of the pandemic, when manufacturers were eager to kick-start flagging sales). Under normal circumstances—with a higher-interest or shorter-term loan—the monthly payment would be higher than it would be with no-interest financing. Basing his calculations on a vehicle price of $38,000, he came up with a rough outline of the potential benefit. 

“A savvy and engaged consumer would take the 0 percent, 84-month loan and siphon the $223 monthly savings into an investment,” he says. “Over five years, with an estimated 4 percent return, that pool of funds would yield close to $15,000, which is nearly $3,000 more than the positive equity position you’d find yourself in at the end of a 60-month loan with a 3 percent interest rate.”

Nana-Sinkam says low-interest, long-term loans will mainly appeal to two very different types of buyer: the “buy and hold” shopper who plans to drive the car until the wheels fall off, and the “three digit” shopper whose financial situation puts them at the mercy of the monthly payment amount.

“There is some meaningful part of the American consumer body that consistently has to pass on financial strategies they know are ‘smarter’ in order to make ends meet,” he says. “Over 60 percent of the American public does not have enough money in the bank for a $500 emergency. That’s uncomfortable, but it’s true.”

Bell says consumers should give themselves budgetary breathing room to free up money for longer-term investments.

“I think consumers are better off when they take a hard look at the rising cost of new cars, and are more conservative in the percentage of income they want to devote to car payments and the total cost of car ownership,” he says. “Superlong loans are not a great idea, even if it seems a lot of people are doing it. Unless you can come up with a really large down payment, you will owe more than the car is worth for many years to come.”

Not sure if you’re the “buy and hold” type? Nana-Sinkam offers sage advice on how to figure that out before you commit by asking the dealer to see a 3- or 4-year-old version of the model you intend to buy.

“Sit in it and drive it and imagine that the new one you buy will be 3 or 4 years old at some point,” he says. “This is what it will drive like and look like and smell like. Will you still be excited about it and happy you bought it? If the answer isn’t ‘hell yeah,’ then recognize that you might get an itch in the middle of a six- or seven-year car loan that is going to be hard to scratch because of that negative equity.”

Shop CR's Car Buying Service From Home

The Consumer Reports Build & Buy Car Buying Service is evolving to face the challenges of shopper needs during the pandemic. The core service engages a nationwide network of over 16,000 participating dealers to provide up-front pricing information and a certificate to receive guaranteed savings off the manufacturer’s suggested retail price. A growing number of dealerships are enrolled in a Buy From Home program, enabling buyers to complete the buying process without going to the dealership. Participating dealerships will take you through the paperwork remotely and deliver a sanitized vehicle right to your home, all at a fair price. When using the Build & Buy Car Buying Service, accessed by clicking the "View Pricing with Incentives" links on our car model pages, you will find Buy From Home participants denoted by a special banner that says, “Buy from Home: Have your vehicle delivered to you and complete your paperwork at home.”

Head shot of CR Autos Editor, Benjamin Preston

Benjamin Preston

My reporting has taken me everywhere from Baghdad, Iraq, to the Detroit auto show, along the U.S.-Mexico border and everywhere in between. If my travels have taught me anything, it's that stuff—consumer products—is at the center of daily life all over the world. That's why I'm so jazzed to be shining light on what works, what doesn't, and how people can enrich their lives by being smarter consumers. When I'm not reporting, I can usually be found at home with my family, at the beach surfing, or in my driveway, wrenching on my hot rod '74 Olds sedan.