How Long to Finance a Car: Choosing a Loan Term
Navigate car financing. Understand how loan term length impacts your budget and the total cost of your vehicle.
A car loan term is the predetermined duration over which a borrower repays money borrowed for a vehicle. This duration, typically expressed in months, directly influences monthly payments and the overall financial commitment of car ownership. The choice of a loan term is a fundamental aspect of vehicle financing, shaping both immediate affordability and the total cost incurred over time.
Understanding Car Loan Terms
A car loan term represents the length of time for repaying the borrowed principal and accrued interest. This period is measured in monthly increments, with options spanning from 24 to 84 months. While 36, 48, 60, 72, and 84 months are widely available, some lenders might offer terms up to 96 months.
Average car loan terms have trended longer in recent years, with data from the first quarter of 2025 showing averages around 68.63 months for new cars and 67.22 months for used cars. These longer terms have become more common as they can make monthly payments more manageable for buyers. However, term availability depends on factors like the lender, the vehicle’s age, and the borrower’s creditworthiness. New car loans often have different term options compared to used car loans.
Financial institutions and dealerships typically present loan terms in 12-month intervals. The selection of a term dictates how quickly the loan principal is reduced and how interest accrues over the life of the loan.
Impact of Loan Term on Vehicle Cost
The length of a car loan term influences both the monthly payment amount and the total interest paid, affecting the overall cost of vehicle ownership. Shorter terms lead to higher monthly payments because principal and interest are condensed into fewer installments. Conversely, longer terms spread repayment over more months, resulting in lower individual monthly payments. For example, a $20,000 loan at 5% interest might have a monthly payment of approximately $460 over 48 months, but about $330 over 72 months.
While lower monthly payments can seem appealing, longer loan terms substantially increase the total interest paid over the life of the loan. This occurs because interest accrues for a more extended period, making the overall cost higher. For instance, a $35,000 loan with a 9% Annual Percentage Rate (APR) could result in over $12,300 in total interest for an 84-month term, compared to about $3,375 for a 24-month term.
The total cost of ownership is directly affected by the loan term. The added interest from a longer term means the consumer pays more for the vehicle overall, as the loan’s principal is paid down more slowly, allowing interest to accumulate on a larger outstanding balance.
The loan term also affects how quickly a borrower builds equity and the risk of negative equity. Vehicles depreciate rapidly, often losing 20-30% of their value in the first year. With a longer loan term, the loan balance might decrease slower than the car’s depreciation. This can lead to the outstanding loan balance exceeding the car’s current market value, known as being “underwater” or having negative equity. Being underwater can create financial challenges if the borrower needs to sell or trade in the vehicle before the loan is fully repaid.
Key Considerations for Choosing a Loan Term
Selecting an appropriate car loan term involves balancing various financial factors to align with personal circumstances.
Personal Budget and Monthly Affordability
Determine how much can be comfortably allocated each month for a car payment without straining other financial obligations or limiting savings goals. Shorter terms mean higher monthly payments, while longer terms offer lower payments and more financial flexibility.
Interest Rate and Total Interest Cost
Longer terms result in higher overall interest paid because the loan accrues interest for a longer duration. Some lenders may also offer slightly higher interest rates for longer terms due to increased risk. Compare the Annual Percentage Rate (APR), which includes interest and fees, for a comprehensive view of the loan’s true cost.
Vehicle Depreciation and Reliability
As cars lose value rapidly, a loan term that extends too far beyond the period of significant depreciation can increase the risk of negative equity. Choosing a shorter term helps ensure the loan balance decreases faster than the vehicle’s value, reducing the likelihood of owing more than the car is worth. Evaluate a vehicle’s anticipated reliability over the chosen term to avoid unexpected repair costs.
Down Payment
A larger down payment reduces the principal loan amount, which can allow for a shorter loan term with manageable monthly payments, or lead to lower payments on a longer term. This also helps to build equity faster and reduces the risk of being underwater on the loan.
Credit Score
A borrower’s credit score influences the interest rates and term options available. Higher credit scores qualify for more favorable rates and a wider selection of terms, as lenders perceive them as lower risk. A lower credit score may limit options and result in higher interest rates.
Future Financial Goals
A longer loan term, while offering lower monthly payments, means being in debt for a more extended period. This could impact other financial aspirations like saving for a home, retirement, or other significant purchases.