How Many Years Can You Get a Car Loan For?
Navigate car loan terms: learn how loan duration impacts your finances and what factors determine your available options.
A car loan is a financial agreement where a borrower receives funds to purchase a vehicle and repays the amount, plus interest, over a set period. The “term” of a car loan refers to this repayment duration, dictating how long a borrower will make payments. This duration is typically expressed in months.
Understanding Common Car Loan Terms
A car loan term signifies the total duration over which the borrowed principal and accrued interest must be repaid. Lenders offer various standard terms, often presented in increments of 12 months. Common car loan terms include 36, 48, 60, 72, and 84 months. Some lenders may extend terms up to 96 months.
The average car loan term has been trending longer, with recent data indicating averages around 68.63 months for new cars and 67.22 months for used cars. Lenders set practical maximums because vehicles experience significant depreciation, losing a substantial portion of their value in the first few years. Lenders aim to mitigate their risk by ensuring the loan balance does not exceed the vehicle’s market value for an extended period, which could occur with long terms due to rapid depreciation.
Factors Influencing Available Loan Terms
Lenders evaluate several variables when determining the maximum car loan term they are willing to offer a borrower. A borrower’s creditworthiness is a primary factor, with higher credit scores generally leading to more favorable terms, including longer loan durations and lower interest rates. Credit scores provide lenders with an assessment of a borrower’s likelihood of repayment. Borrowers with lower credit scores may find their loan term options more restricted, limited to shorter periods.
The type and age of the vehicle also influence available loan terms. New cars often qualify for longer loan terms compared to used cars, as they typically hold their value better and are considered less risky by lenders. For used vehicles, lenders may impose shorter maximum terms, particularly for older models or those with high mileage, often capping them at 36 to 72 months. Lenders perceive older cars as higher risk due to potential mechanical issues and faster depreciation, which could affect their resale value if repossession becomes necessary.
The total loan amount and the borrower’s debt-to-income (DTI) ratio are additional considerations. A larger loan amount might necessitate a longer term to maintain manageable monthly payments, though this also increases lender risk. The DTI ratio, which compares monthly debt obligations to gross monthly income, helps lenders assess a borrower’s capacity to handle debt payments. Lender policies and risk tolerance also play a role in the terms offered.
Financial Impact of Loan Term Selection
The chosen car loan term affects a borrower’s financial landscape, impacting monthly payments, total interest paid, overall vehicle cost, and equity accumulation. A longer loan term results in lower monthly payments because the principal and interest are spread over more installments. For example, financing a $30,000 car at a 6% interest rate over 72 months would yield a lower monthly payment compared to a 36-month term. This reduced monthly burden can make more expensive vehicles seem affordable.
A longer loan term leads to a greater amount of total interest paid over the life of the loan. Interest accrues over a longer period, increasing the overall cost of borrowing, even if the interest rate remains the same. Conversely, a shorter loan term results in higher monthly payments but reduces the total interest paid, lowering the overall cost of the vehicle.
Equity accumulation is also influenced by the loan term. Shorter terms allow borrowers to build equity in their vehicle more quickly, meaning the loan balance is paid down faster than the vehicle depreciates. With longer terms, the slow pace of principal reduction, combined with rapid vehicle depreciation, increases the risk of being “upside down” or having “negative equity.” This occurs when the outstanding loan balance exceeds the vehicle’s current market value. Being upside down creates financial challenges if a borrower needs to sell or trade in the vehicle before the loan is fully repaid, as they would owe the difference between the loan balance and the car’s value.