What Term Should Your Car Loan Be When Buying?

 Quick Facts About Car Loans and Length of Financing

• The most common car loan terms are from 36 to 72 months.
• The longer the loan term for a car, the more you will pay in interest for using the lender’s money, meaning you pay more for the vehicle overall.
• For most of us, the main problem with short-term loans is the larger monthly payment. 

A one-size-fits-all approach to the right car loan length for a new or used vehicle doesn’t consider you. It doesn’t consider factors like your monthly budget and creditworthiness or the things that differ from your neighbor’s situation. If your credit score is 750, you have a completely different perspective on borrowing money than your neighbor with a 600 credit score.

We aim to provide general advice for the average borrower. But even if you are on the far extremes of the credit-score bell curve (above 800 or below 500), you can still benefit from the advice presented here.

Still muddying the waters, the auto market continues to regroup from supply chain shortages. According to analysts at Cox Automotive (the parent company of Autotrader), some new cars continue to sell at or above the manufacturer’s suggested retail price (MSRP). In other words, buyers pay more than the carmakers ask for the car because demand outstrips supply. For used-car buyers, inventory remains extra tight. Add in higher interest rates, and you see car payments reach new levels. Getting a handle on what borrowing strategy will work best for you in this volatile automotive market is more challenging than ever. We break it down for you.

Why Buy a Car on Credit?

Many consumers take out a loan for a car purchase because most of us can’t pay cash for a new or used car. According to the credit experts at Experian, fewer than 20% of new-car purchases were cash transactions. That means about 80% of us borrow money from a lender and pay it back monthly until the loan gets paid in full.

Cox Automotive reports that the average transaction price for a vehicle reached $48,759 at the end of 2023, with an average monthly payment of $770.

According to Experian, the average new car loan term in the first quarter of 2024 was nearly 68 months, with an average interest rate of 6.73%. Experian reports that the average loan rates for used car buyers reached almost 12% in the first quarter of 2024. During that period, the average amount financed on used cars was $26,073, down about $500 from 2023. The average loan length for used car loans was 67.4 months, with payments of $523 per month.

However, very few of us are average. Once we’ve decided to buy a new car and borrow the money, we need to figure out what loan length (term) will best fit our budget.

So, if you’re wondering what the typical car loan length is and what terms you should choose, this article should answer these questions:

• How Long Can I Finance a Car? 
• What Are the Disadvantages of Long-Term Loans? 
• What Are the Disadvantages of Short-Term Loans? 
• How Do Interest Rates Impact Car Loan Terms?
• Is a Short-Term or Long-Term Loan Better? 

How Long Can I Finance a Car?

You may be able to find lenders that will customize car loan terms, but that’s an exception and not a norm. The most common terms for car loans are 24, 36, 48, 60, 78, and 84 months. A few lenders will even go as high as 96 months. However, again, that’s an exception and not the norm. The average length of a new car loan taken out during the first quarter of 2024 was 67.6 months.

What’s the difference between a 24-month loan and an 84-month loan? The simple answer is that the longer the term, the lower the monthly payment. OK, problem solved, right? What’s to decide? The math shows you should go with the longer term and the lower payment. However, there’s more to it than that.

What Are the Disadvantages of Long-Term Loans?

When you take out a car loan of any length, you don’t buy the car; the lender does. In other words, the lender pays the seller for the vehicle. Your monthly payments repay the lender. The car doesn’t belong to you until you pay the lender all your borrowed money. The lender doesn’t loan you the money out of the goodness of its heart. With your signed promise to pay the lender back, you also agree to pay a fee (the interest rate) for using that money.

When signing the paperwork at the dealer, you’ll face the temptation to accept longer loan terms. There’s a reason: Monthly payments become lower when stretching them out over a more extended period. Initially, that might seem like it’s more cash in your pocket or a good thing.

But the longer the loan term, the more you will pay for using the lender’s money. So, although your monthly payments will be lower for a 72-month loan than a 48-month one, you will pay more for the car. Moreover, many lenders raise the interest rate percentage as the length of the loan increases. You may pay a higher interest rate for a 36-month loan than a 24-month loan.

For example, you can use Autotrader’s monthly car payment calculator and see that financing $25,000 of a new car purchase at 6.73% for 36 months will cost $2,678 in interest over the life of the loan. If you finance the same amount at the same interest rate for 72 months, you’ll spend $5,455 in interest over the life of the loan. That’s an extra $2,777, and you will pay for that car. And that’s if the interest rate doesn’t increase with the longer term.

Here’s a table with calculations based on financing $25,000 at a rate of 6.73%. It shows the monthly payment, total interest paid, and the total amount paid over the course of the loan.

 There’s More to Consider

Let’s say you are willing to bear the additional cost of a 72-month loan to score lower monthly payments. Paying a higher fee for using the money isn’t the only disadvantage a longer-term loan involves. Here are two other issues to consider.

• Equity: When using a long-term loan, you won’t have any equity in the car until close to the payoff date. That means you will owe more than the car is worth until the final few payments. It will have no benefit as a trade-in if you want to buy another vehicle. A lender will roll the difference between its value and the amount you owe into your next car loan.
• Repairs: Most new car warranties have expired long before a car is five or six years old. With a longer-term loan, you may well find yourself paying for expensive repairs on a vehicle on which you are still making monthly payments. Neither of these issues makes financial sense for you or your family.

What Are the Disadvantages of Short-Term Loans?

So why not go for a short-term loan and take advantage of a lower rate? For most of us, the main problem with short-term loans is the larger monthly payment. After all, it’s no fun making luxury car-like monthly payments on a mainstream car, such as a Honda Accord or Toyota Camry, even if you know it is the more intelligent financial decision.

For another example, check out our chart above. If you finance $25,000 of a car purchase at 6.73% interest for 36 months, the monthly payment is $769. Financing the same amount at the same interest for 48 months makes it $596 per month.

We all face restrictions with monthly budgets and often have no choice but to spread out the cost of a vehicle. However, avoid loans over 48 months if you can.

How Do Interest Rates Impact Car Loan Terms? 

Beyond the length of a loan, your credit history and other factors can affect your actual interest rate. Here’s an example of the difference in the monthly payment and the total cost of interest for two different interest rates.

Let’s make another visit to Autotrader’s monthly car payment calculator with our $25,000 to finance for 60 months at 6.73%. That comes to a monthly payment of $492, with a total interest cost of $4,511. Financing at 8% for 60 months totals $507 per month, with a total interest cost of $5,415.

Getting the best interest rate you deserve can save you money, no matter the loan length.

What Is the Typical Car Loan Length?

Credit bureau Experian reports that the typical car loan length was close to 68 months (more than 5.5 years) in the first quarter of 2024. The typical length for used car loans was about a month shorter at about 67 months.

How Can I Reduce My Monthly Car Payment?        

You have several options for lowering your monthly car payment:

• Buy a more affordable model: Maybe it just means picking a lower trim level of the same model or settling for the next lower segment. In any case, lowering the transaction price will reduce monthly payments.
• Larger down payment: The more you put down upfront, the lower the transaction price and the less the monthly payment. Even if your down payment consists of a trade-in, add more cash to sweeten the pot. We advise a minimum down payment of 20%; however, lenders will often take less.
• Find a lower interest rate: More often than not, your interest rate will be based on your credit score. However, different lenders view credit scores differently; consequently, your score may translate into a lower interest rate from one lender to the next.
• Increase the loan term: Extending the length of time to pay off the loan is the least attractive of our suggestions for lowering the monthly payment. It means paying more (and sometimes higher) interest over the length of the loan. It can also extend the time before you have equity in the vehicle. However, extending the loan by 12 months can mean a much lower monthly payment.

Is a Short-Term or Long-Term Loan Better?

Ultimately, our advice is simple: When buying a car and considering a car loan, opt for the shortest term and the best possible interest rate. This option might not be the most appealing, considering it will increase your monthly payments. Plus, it may limit the type of car you can afford. But down the road, you’ll thank yourself when you’ve saved thousands in interest and paid off your car years before you thought you would.

Editor’s Note: This article has been updated for accuracy since it was originally published.