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Purchasing a new car is a big deal. It involves a lot of responsibility and decisions. If you’re financing your purchase with an auto loan, you’ll need to decide the length of your loan.
Most lenders offer 24, 36, 48, 60, 72, or 84-month loan terms. However, some lenders offer terms as long as 96 months.
According to an Experian State of the Automotive Finance Market Report, the average car loan length in Q4 2023 for new cars was 67.9 months and 67.4 for used cars.
How to Decide What Car Loan Length Is Best?
When most people take out a car loan, they focus on the monthly payment. They want to make sure they can afford it. However, a lot more needs to be considered when choosing the best loan term for your situation.
Longer loan terms mean you’ll pay more interest over the life of the loan. They also typically have higher interest rates.
Let’s look at an example to help you better visualize how payment amounts and total interest can fluctuate based on loan terms. Suppose you want a $25,000 car loan and are approved for 7%.
| Loan Term | Payment Amount | Total Interest Paid |
| 24 months | $1,119.31 | $1,863.55 |
| 36 months | $771.93 | $2,789.39 |
| 48 months | $598.66 | $3,735.49 |
| 60 months | $495.03 | $4,701.80 |
| 72 months | $426.23 | $5,688.21 |
| 84 months | $377.32 | $6,694.63 |
| 96 months | $340.84 | $7,720.92 |
Short-term Car Loans vs. Long-Term Car Loans
As you can see, the payment amount significantly decreases as your loan term gets longer. This is because your loan balance is spread across more monthly payments.
These lower monthly payments have advantages for many consumers. The most significant is that you may be able to afford to purchase a more expensive, more reliable car, which can mean lower maintenance costs.
However, even though the payment amounts will decrease with longer loan terms, the amount you’ll pay in interest over the life of the loan will increase. From our example above, you’ll see that going from a 24-month loan to a 96-month loan meant you’d pay an additional $5,857.37 in interest.
That’s a significant amount of money on a $25,000 loan.
Plus, you’ll want to remember that longer loan terms typically have higher interest rates. In the example above, the same rate was used for all loan terms. That means the interest rate spread between 24-month- and 96-month loans is slightly larger.
When deciding the best loan term, start by understanding your budget. How much can you reasonably afford to spend monthly on car payments without feeling your finances are stretched thin? The idea is to find the shortest loan term that you can afford.
Risks of Having a Longer-Term Car Loan
Given that the average car loan term is over five years, many people value the ability to lower their monthly car payments. However, as we discussed, this comes at the cost of additional interest on your loan. But that’s not the only risk of choosing a longer term.
Unlike your home, which likely appreciates over time, most cars depreciate as they age. Longer loan terms increase your chances of becoming underwater, which means you own more on the loan than the car is worth.
You’ll also need to consider that as the car ages, it will require additional maintenance, and the repair costs can add up. These are all things that must be considered when choosing a loan term.
Is a Short-Term or Long-Term Loan More Affordable?
Long-term loans are more affordable if you’re thinking in the present. This is because they offer borrowers the ability to make lower monthly payments.
However, short-term loans are going to reduce the cost of borrowing money which makes them more affordable overall.
How to Get a Lower Monthly Payment Without Extending Your Loan Term
Luckily, there are ways to lower your monthly payment without extending the loan term.
- Increase Your Down Payment: One of the easiest ways to reduce your monthly payment is to use a larger down payment when you purchase the car. This will reduce the amount you need to borrow to purchase the car. It can also help you avoid owing more on the car than it’s worth.
- Shop Around: Like any other loan, shopping around is essential to find the best deal. Even a slight reduction in the interest rate can mean meaningful savings on your monthly payment.
- Improve Your Credit: If your credit score isn’t as high as you’d like it to be and you can delay purchasing a new car, you can take time to improve it. The higher your credit score, the better interest rates you’ll qualify for.
The Bottom Line
Most car loan lenders offer various terms ranging from 24 to 96 months. Even though the average car loan length is just over 67 months, that doesn’t mean it’s what’s best for your situation.
It’s important to understand how varying loan terms can affect your monthly payment and overall interest in order to find the best loan term that suits your needs.