How Long are Car Loans?
While some car buyers bring cash to the table to pay for their vehicle up-front, most buyers opt for a car loan. Financing a vehicle with a loan allows buyers to make monthly payments on their vehicle, and, for many buyers, this enables such a large purchase to fit into their budget. More than 80 percent of car buyers financed their purchase in the first quarter of 2021.
How long are car loans? The length of a car loan can depend on the buyer’s financial situation or even just their personal comfort. For example, some buyers opt for longer-term loans to make the monthly payment more manageable for their budget. The longer loan may allow them to buy more cars for their budget. Others choose to pay for their car over the course of a few years.
Car loans can extend for:
- 12 months (one year)
- 24 months (two years)
- 36 months (three years)
- 60 months (five years)
- 72 months (six years)
- 84 months (seven years)
However, some buyers receive financing for 70 months or a term that doesn’t fall into a specific number of years. Is there an ideal loan term? Here’s what buyers need to know about car loan lengths and deciding what term is ideal for their situation.
Three Years or Less: The Short-Term Payoff
Some buyers want to pay their car off quickly, but they still need to finance their purchase. A three-year loan term or less means fewer payments. For this reason, buyers will be paying more per month for their vehicle.
Not all buyers can opt for a shorter loan as payments are often more expensive when they are only spread out over three years. However, some buyers offer a trade-in or have saved a large down payment to offset higher monthly payments.
The benefits of a shorter loan term include:
- Paying off the vehicle when it’s still relatively new
- Possible lower interest rates
- Paying less interest (and, ultimately, paying less for the vehicle)
While monthly payments are higher when compared to a longer loan, the benefits are appealing to those who can afford higher payments. A shorter loan term means that the buyer pays less in interest over time, which also means they pay less for their car. Shorter loans also may lead to more favorable interest rates.
In addition, as the buyer is paying down more principal each month, they are building equity in their vehicle. After the loan is paid off in three (or fewer) years, the resale value of the vehicle represents full equity for the car owner.
Five to Six Years: The Standard Loan
In the past, the standard car loan was three to five years. Today, the most common car loan is about six years. Depending on the buyer’s credit score, interest rates can vary. However, some buyers might have exceptional credit that allows them to finance the car at low promotional rates—sometimes 0 percent interest.
If the buyer has access to a 0 percent interest rate, then every payment will be applied to principle. It may take them longer to build equity than an individual with a shorter loan term, as cars depreciate more during the first few years.
Buyers might opt for a five-year loan to keep monthly payments lower and within their budget.
Six Years and Beyond: The Longer-Term Car Loans
While a six-year car loan might be the most popular loan term for many car buyers, others elect to finance the car longer than six years. Loan terms can extend to 84 months or seven years. Are there any benefits to these loans?
The major benefit for car buyers is that these long-term loans allow them to lower their monthly payments. Some buyers might need a car now but cannot afford the monthly payments quoted to them for a five-year loan; to manage the purchase, they elect a longer loan term.
Other buyers might want to buy a more expensive car or a luxury car. Opting for a long loan provides an affordable option for them to buy more car for their money.
Unfortunately, these loans come with a few downsides. Long-term loans might allow buyers to make lower payments, but they also are associated with:
- Higher interest rates
- Paying more in interest over time (and paying more for the car)
- Being upside down in the beginning of the loan
- Making payments for an older car
Longer loan lengths mean that the buyer will pay more in interest over the course of the loan. Ultimately, this adds to the price of the vehicle. When a buyer opts for a longer loan, they also might be underwater in the beginning. Less money will be allocated to principal, and cars depreciate the most during the first few years after the purchase.
In addition, Experian explains that longer-term loans are often associated with higher interest rates. This just adds to the amount of interest paid over the course of the loan.
Buyers who choose longer term loans also will be paying for their car for seven years or maybe more. A seven-year old car might face more mechanical issues or breakdowns. These expenses would be on top of monthly car payments.
Is there an Ideal Car Loan Length?
The best loan term isn’t the same for every buyer. Not all car buyers can afford the higher payments associated with shorter-term loans. Some might need longer term loans to afford even a low-priced vehicle.
Every buyer’s financial situation is unique, but buyers should weigh the pros and cons of the loan terms they are considering. They also can review their own financial situation to better understand what they can afford and the loan terms they might feasibly secure.
Before buying a vehicle, buyers can request their credit report—all consumers are entitled to a free report each year. Reviewing their credit score and their credit report helps buyers learn their credit worthiness. Those with high scores might be able to secure more favorable interest rates.
In addition, there are many loan calculators online that help buyers tap into the cost of their vehicle. These calculators require car buyers to enter the price of the vehicle and plug in interest rates and other data. Using these calculators, buyers can learn how much they might pay per month for their vehicle. They also might adjust the loan terms to see how the numbers change.
Many buyers don’t think about how the interest of a purchase adds up over time. When buying a car, though, consumers may pay considerably more interest when opting for a long-term car loan. While the monthly payment might be cheaper, in the long term, the car is actually more expensive because of the interest payments.
Still, buyers need to choose the car loan option that they can afford. Sometimes this might be the long-term option. However, buyers also can use sites like Carzing to get pre-qualified for financing; going through this process allows buyers to see all their loan options including the monthly payment amounts.
Getting pre-qualified for a car loan doesn’t mean that the buyer has secured the financing. Instead buyers can use this as a tool to better understand their loan options and find the best financing terms to fit their budget.