How Long Does it Take to Pay off a Car?

Paying off any debt can feel like a huge weight has been lifted. As the majority of car buyers finance their vehicle, car loans are a very common monthly payment. The price of new cars has increased steeply, and the average price of a new car is now more than $46,000.

Car loans can range in length; some extend up to seven years or more. However, most car buyers finance their vehicle for a term of about six years. New buyers might wonder if this is just the new normal. How long does it take to pay off a car? The answer depends on several factors, and they all can impact the loan term a buyer chooses. These factors include:

• Credit worthiness/risk and the associated interest rate

• Down payment amount

• The monthly budget

What is the Ideal Loan Term for a Vehicle?

Buyers might wonder if there is an ideal amount of time—or term—they should choose for a new car. Ideally, the shorter terms can be the best options. Not only does the buyer eventually own the car sooner, but they also begin paying down more of the loan principal earlier, too. This can help decrease the impact of depreciation.

There isn’t a magic loan term that works for every buyer, and this is due to the fact that buyers might base their choice of loan terms on the affordability of the monthly payment. If the buyer can’t afford a monthly payment with a shorter loan term, then the dealership might show them numbers related to a longer loan period.

Suddenly, the car could become affordable. However, the buyer might be tied to those car payments for seven years or more. For some buyers, even the cheapest car on the market might be a stretch. To make payments affordable, extending the loan could seem to be the best option.

There are downsides to longer loans, though. As the interest is applied over a longer period, buyers will pay more interest on the vehicle. Interest rates might be higher on longer loan terms, too. In addition, since less principle is applied early on, the car could be underwater in value (especially if the buyer didn’t have a large enough down payment).

Longer loan terms will take longer to pay off. Car owners might not own the car outright for seven years or more. By that time, the car could have some serious wear and tear.

How Credit Worthiness & Risk Can Impact Paying the Loan Quickly

Car buyers might wonder why credit worthiness and risk is associated with the time it takes to pay off a car. The reason is due to the impact that a credit score can have on interest rates.

Those with poor or lower credit scores could face higher interest rates. These higher rates will increase the monthly payments. Buyers might realize that these rates make their car unaffordable if they choose a shorter term. Those with a lower credit score might take longer to pay off their vehicle because a higher interest rate made a shorter term unfeasible.

Before buying a car or shopping at a dealership, buyers can request a copy of their credit report. Every 12 months, consumers can receive a free copy of their credit report. Review the report and the credit scores; while the scores on a free report won’t be exactly the score that lenders review, it should be close. Understanding credit health can help buyers prepare for lower or higher rates.

The Down Payment Amount Can Help Buyers Choose Shorter Terms

Experts recommend that buyers allocate a 20 percent down payment for a new car and a 10 percent down payment for a used car. The down payment can help offset the impact of depreciation. New cars depreciate nearly 10 percent once they drive off the lot.

A down payment helps reduce the overall purchase price of the vehicle. Allocating more than 20 percent for a down payment could allow buyers to finance their car over a shorter period. For example, a buyer who purchases a Toyota Camry might put $10,000 down and reduce their purchase price to less than $20,000.

Lowering the purchase price could mean that the buyer could finance the car for only five years or maybe less, depending on their financial situation. However, a down payment could be impactful to lowering the cost of the vehicle and choosing to pay down the loan in a shorter amount of time.

The Monthly Budget

One of the most crucial factors that can impact the loan term the buyer chooses for their vehicle financing is their monthly budget and financial health. Before shopping for a car, buyers should review their monthly income (take-home pay) and their expenses. Does income exceed expenses?

Understanding the state of finances can help buyers figure out the amount they can reasonably spend each month for a car payment. In addition, Nerdwallet recommends that buyers allocate less than 10 percent of their monthly take-home pay (the amount after taxes and deductions) for the monthly car payment.

If an individual makes $3,000 per month, then the car payment should be less than $300. However, some individuals have large student loans, credit card debt and other monthly payments that could eat up much of their income. Some buyers need to spend much less than 10 percent of their income, but others could spend more (if they have little debt) and extra wiggle room.

If a buyer can only spend $300 per month on a car payment, they might feel that choosing longer loan terms is the only way to afford a vehicle. When the budget is crunched, though, buyers might focus on less expensive models that allow them to afford a new car and pay it off in a shorter period of time.

Nerdwallet offers a Car Affordability Calculator that helps buyers understand how much they can spend on a car based on their own financial circumstances. Buyers need to know their credit score range when using the calculator, though.

Tips for Paying off a Car Loan Early

If buyers take on a seven year loan for their new car, they can still pay it off early. Before paying down the loan in chunks or in full, though, buyers should talk to their lender about any fees or penalties associated with an early payoff.

Here are four ways to pay down the car loan to own the car sooner:

• Pay extra each month on principal (ask the lender if a separate check is needed for additional payments and how the payment needs to be marked)

• Pay off the entire amount in one large payment

• Use tax refunds or holiday gifts to make additional payments

• Refinance the loan for a shorter term

Some car owners allocate tax refunds or even holiday cash gifts for extra payments on their car loan. Additional payments can help decrease the principal to pay off the loan sooner. However, buyers should make sure to contact the lender so these payments are applied as the buyer intended (for principal).

Is there an Ideal Loan Term?

While shorter loan terms allow car buyers to pay off the vehicle sooner to own it outright, some buyers need the monthly affordability that longer terms could provide. Every buyer has a unique financial situation, and this could impact their financing choice.

When buying a car, consumers should review their credit report to understand their score and how it might impact loan interest rates. Longer loans might provide more affordable monthly payments, but they also could impose higher interest rates. In addition, buyers also should understand the impact of depreciation and how longer terms could translate to their loan debt exceeding the car’s value.

Ultimately, though, car buyers need to find the loan that best suits their financial situation. Buyers should review the terms, interest rates and any down payment obligations to understand which financing option is their best choice.