What is The Average Length of a Car Loan?

Shopping for a new car is an exciting experience, especially if you plan to finance your purchase. Before heading to the dealership, it’s important to find the right loan and understand the details involved. When comparing auto loan interest rates, also consider the length of the loan term.

The loan term is the duration over which you’ll repay the auto loan. A longer loan term typically results in lower monthly payments. Loan terms usually range from 24 to 84 months, with some lenders, like Autopay, offering terms up to 96 months.

According to Experian, the average loan term for new car buyers is about 67.62 months, while used car buyers average 67.37 months.

How long should you finance a car for?

Choosing the right loan term depends on how much you can comfortably afford for your monthly payment. While a longer term lowers your monthly payment, it also increases the total cost of borrowing.

Here’s a step-by-step guide to help you find the loan term that suits your needs:

• Determine Your Budget: Assess both your monthly budget and the total amount you plan to spend on the car. Financial experts recommend that no more than 20 percent of your take-home pay go toward an auto loan payment. Also, consider any potential changes in your financial situation, such as job security, which might influence your decision.
• Get Prequalified: Shop around and get prequalified with at least three lenders to find the best rates. Start with your local bank or credit union, as you may benefit from favorable terms due to your existing relationship with them.
• Analyze Borrowing Costs: Use an auto loan calculator to input your prequalification results and estimate your monthly payments. Review the amortization table to understand how your payment and total interest costs vary with different loan terms.
• Make a Decision: Weigh both the monthly payment and the overall cost of each loan term. Once you select the term that fits your budget and financial goals, apply for preapproval with your chosen lender. Preapproval offers a formal commitment from the lender and strengthens your position during negotiations with the dealer.

The table below illustrates how different loan terms can affect your monthly payment and total interest costs based on a $40,000 loan with a 6.5 percent interest rate.

Long-term vs short-term car loans

If you’re uncertain about which loan term is best for you, think about how it will affect your finances. A longer repayment period results in a lower monthly payment, but this advantage comes with a trade-off: you’ll end up paying more in interest over the life of the loan compared to a shorter term.

Pros and cons of a long-term loan

If you’re considering a long-term loan, weigh these benefits and drawbacks to make a well-informed choice:

Pros:

• Lower Monthly Payments: A longer term can make your auto loan payment more manageable if you’re on a tight budget.
• Increased Affordability: With a longer term, you might afford a more expensive vehicle that fits your needs.

Cons:

• Higher Borrowing Costs: A longer term means more time for the lender to accrue interest, leading to higher overall borrowing costs.
• Risk of Being Upside-Down: You might owe more than your vehicle’s value, which can be problematic if you intend to sell or trade in the car soon.

Pros and cons of a shorter auto loan term

Short-term auto loans offer several benefits that might make them a more attractive option:

Pros:

• Lower Borrowing Costs: With a shorter loan term, you’ll pay less in interest over the life of the loan.
• Faster Ownership: You’ll own the car outright sooner, potentially mitigating the effects of depreciation and freeing up your budget more quickly.

Cons:

• Higher Monthly Payments: Expect higher monthly payments, which may limit you to less expensive vehicles.
• Budgetary Constraints: A shorter loan term can strain your budget, particularly if you don’t make a significant down payment.

How loan term affects your car payment

In essence, a longer loan term results in lower monthly payments. However, stretching the loan over a longer period increases the total interest paid over the life of the loan. While your monthly payments may be more manageable, the overall cost will be higher.

Additionally, longer-term loans often come with higher average interest rates. This is because extended terms present greater risk for lenders. The longer the loan, the higher the likelihood of financial difficulties that could lead to default before the loan is fully repaid.

Although the lower monthly payments of a long-term loan may be appealing, the overall cost may outweigh the benefits.

In Conclusion

Car loan terms typically range from 24 to 84 months. The best term for you depends on your budget and how much you can comfortably afford each month.

While a shorter term can significantly reduce your overall interest costs, it might not always be suitable for financing your ideal vehicle. However, if you can opt for a more affordable model without compromising too much on what you want, the long-term savings could make it a worthwhile trade-off.