How Long Should You Finance a Used Car?

Financing a used car involves several considerations, with the loan term being a particularly impactful decision. The loan term dictates the repayment period, directly influencing both the monthly payment and the total cost over the loan’s life. Understanding how this term affects your financial situation is important for an informed choice.

Understanding Loan Terms and Their Financial Impact

A loan term refers to the predetermined length of time, expressed in months, over which a borrower repays a debt. For used car financing, common loan terms range from 24 to 84 months, with 36, 48, 60, and 72 months being common choices. Some lenders offer terms up to 96 months, though less common for used vehicles. The average used car loan term in the first quarter of 2025 was approximately 67 to 70 months.

The relationship between the loan term, monthly payment, and total interest paid is straightforward: a longer term leads to lower monthly payments. This spreads principal and accrued interest over more installments. Conversely, a shorter term results in higher monthly payments as the amount is repaid over fewer periods.

Focusing solely on the monthly payment can obscure the total cost. While lower monthly payments might seem appealing, they often mean paying significantly more in total interest over the loan’s duration. Interest accrues on the outstanding principal, so extending the repayment period means interest is paid longer. For example, a $25,000 loan at a 5% interest rate could incur approximately $1,800 in interest over 60 months, but around $2,800 over 84 months.

The annual percentage rate (APR) reflects the total cost of borrowing, including interest and fees. Used car loan APRs vary based on credit score, loan amount, and chosen term. In the first quarter of 2025, the average used car loan interest rate was 11.87%. This average ranged from 6.82% for excellent credit scores to over 21% for lower scores.

Shorter Versus Longer Loan Terms

Shorter loan terms, often 24 to 48 months, present several financial benefits. A primary advantage is reduced total interest paid. Faster principal repayment means less time for interest to accumulate, resulting in savings. This also builds vehicle equity faster. As more of each payment reduces principal, the difference between the car’s market value and outstanding loan grows rapidly.

A shorter term also mitigates the risk of negative equity, where the amount owed exceeds the vehicle’s current market value. Cars depreciate quickly, losing significant value initially. While used cars depreciate slower than new ones, a short loan term helps ensure the loan balance decreases faster than the car’s value declines. The main drawback is the higher monthly payment, requiring greater immediate financial commitment.

Conversely, longer loan terms, often 60 to 84 months or more, offer lower monthly payments. This makes a more expensive used car seem affordable, providing financial flexibility. The reduced monthly obligation might also allow saving or directing funds toward other financial goals.

Longer terms come with disadvantages. The primary one is increased total interest paid, making the car more expensive. Slower principal reduction means longer to build vehicle equity. This prolongs negative equity, particularly in early years when depreciation is a factor. Being “upside down” on a loan creates challenges if selling or trading the car before full repayment.

Factors Guiding Your Decision

A buyer’s personal budget and monthly cash flow are primary considerations when determining a used car loan term. Assess how much can comfortably be allocated to a car payment without straining financial obligations. While a lower monthly payment from a longer term might seem attractive, analyze the total cost of the loan to ensure it aligns with long-term financial goals.

Credit score plays a role in the loan’s interest rate, total cost, and affordability. A higher credit score qualifies borrowers for lower interest rates, reducing total interest paid regardless of the loan term. A strong credit profile offers flexibility to choose a shorter term with higher payments, benefiting from reduced costs. Conversely, a lower credit score might necessitate a longer term for an affordable monthly payment, but this comes with a higher interest rate and greater total cost.

The used car’s age and expected lifespan are important factors. Cars lose significant value in the first few years; new cars lose around 20% in the first year and up to 60% within five years. Used cars depreciate more slowly, but their value continues to decline. Choosing a loan term that extends beyond the vehicle’s expected useful life or significant value retention can increase negative equity risk. Align the loan term with the car’s realistic lifespan, ensuring the loan balance decreases at a reasonable pace relative to its depreciating value.