How Long Should My Car Loan Be?

  • Post Category:Loans

Blue car and car loan application form with car keys and car modelWhen you go shopping for a new vehicle, you’re probably wondering how long your car loan should be. Most of us need to finance our cars—rather than paying cash—so it’s a crucial question. We have done the research to find the answers—and we’ll outline the details here.

Car loans range from 24 months to 84 months, but the “best” term isn’t an exact number of months. Instead, a car loan should be the shortest term possible with the lowest payment possible.

What does that mean for your finances and your purchasing prospects? We’ll delve deeper below and explain all the possibilities.

How Many Years Can a Used Car Loan Be?

Used car loans are typically shorter than new car loans. That’s because cars depreciate quickly, and lenders want to ensure you’ll pay the vehicle off—even if you end up owing more than it’s worth.

Each lender will have its own rules and specifications on used car loan terms. It’s possible to find term lengths ranging from 24 to 84 months.

That said, most lenders won’t want to finance a used car or truck for seven years.

The term you can qualify for also depends on your credit score, debt to income ratio, and other financial factors.

Learn more about whether car loan pre-approvals affect your credit score in our post on the subject.

What is the Longest Auto Loan Term?

Vehicle financing has changed in recent years. Today, consumers can take out an 84-month loan on a new car. Unfortunately, a lot of people buy outside their means instead of opting for a shorter-term on a more affordable vehicle.

However, for used vehicles, most lenders don’t want to finance beyond 72 months. Options vary by lender, so your best bet is to shop around for the best terms and rates.

Is an 84-Month Car Loan a Bad Idea?

If your financial situation is limited, and you desperately need a vehicle, a longer-term might sound appealing. Spreading out the cost of a vehicle over seven years does lower your monthly payment.

But choosing an 84-month term means you’ll be paying interest and fees for each of those months. You’ll be paying more interest than if you chose a shorter loan term—even with a higher monthly payment.

The shorter your term, the fewer financing charges make their way into your payment. So, overall, choosing a longer loan term is not a great idea.

Your vehicle will depreciate faster than you can pay the balance down. If you end up needing to sell the car, you will probably lose money.

In some cases, an 84-month loan may be the only way to finance an automobile—new or otherwise. For a person without any debt, the deal might not seem so terrible.

Especially if your payments are low, you may accept the fees to get into a car. Make sure to check the terms carefully if you go that route.

Is a 72-Month Car Loan Bad?

In the United States, the majority of consumers choose a 72-month loan, according to data from Consumer Finance. Considering that 72 months is six years, that’s a significant commitment.

While lenders are hesitant to admit that such an extended loan is “bad,” you will pay a lot in financing costs. Your loan payment includes interest and principal amounts, plus any other lender fees.

Especially for a used car, that means paying more than what the car is worth. Of course, since loan terms vary depending on the bank or financial institution, some deals are better than others.

Learn more about whether car loans amortized like mortgages or if they’re simple interest in our post on the topic.

Is a 60-Month Car Loan Bad?

A 60-month car loan is the next most common term length for consumers in the US. But is it a good idea?

60 months is five years, long enough for even a brand-new vehicle to become outdated. Car manufacturers tend to upgrade their models each year, increasing demand and revenue.

What that means is your vehicle’s value will drop. While you continue paying the same monthly amount, the car’s worth will fluctuate.

Even if you don’t plan to sell, recognizing that you’re paying too much for your car is part of being a savvy consumer. A shorter loan term is nearly always in your best interest as a consumer.

Is a 60-Month Car Loan Too Long?

While most consumers choose a 60- or 72-month car loan, both are probably too long. Data suggests that most used vehicle buyers keep their cars for an average of 66 months.

That means only six months of debt-free ownership after paying off your car. Despite your best intentions when buying a vehicle, you may decide to trade it in later.

But by the time you pay off the loan, you’ve already lost money. Therefore, for the average consumer, a 60-month loan is way too long.

How Much More Will a Longer Loan Cost?

The overall cost of your loan will vary based on the purchase price and APR. Consider a purchase scenario for a $20,000 car with an interest rate of 3 percent and a loan period of 48 months.

If you made a $1,000 down payment, your monthly payment would be $458.18. By the time the vehicle was paid off, you would have spent $22,992.64.

In contrast, the same car at a 3 percent rate spread out over 84 months would cost $273.52. Your total investment would be $23,975.68.

That’s a difference of almost $1,000 in taxes and fees. Your costs could be higher or lower, but the fact remains that longer loans aren’t a great financial deal.

Try out an auto loan calculator to compare offers before signing for a loan, and thoroughly investigate all your financing options.

What’s a Good APR for a Car Loan?

Another factor that affects whether your loan is a good deal or not is the APR. APR stands for Annual Percentage Rate and translates to how much you pay for the privilege of financing your purchase.

A good APR is crucial to keeping your vehicle payments affordable. But to get a decent APR, you need to have good credit and low debt.

For people with excellent credit scores, an APR as low as 2 percent may be possible, whether for a new or used car. Some buyers may take advantage of zero-down or zero-APR financing on brand-new vehicles, too.

Most zero-APR offers happen when dealerships are clearing out inventory. Some are short-term offers, though; reading the fine print is essential for ensuring you’re getting what you think when you sign.

But for someone with a poor credit score or lack of credit history, the zeroes might be at the end of the APR instead. Rates can soar up to 25 percent, even on used cars.

A “good” APR is typically anything below 7 percent, but the lower, the better.

How Can I Get the Best APR on a Car Loan?

Getting a reasonable rate comes down to your creditworthiness. Maintaining a good credit score is vital for qualifying for a vehicle loan, home mortgage, or any other financial offering.

Lenders want to see that you make payments on time. They also want to see you manage your credit (and debt) properly. Keeping your credit card usage below 30 percent, for example, can help your credit and show you’re responsible with money.

Shopping around can also help you secure the best APR possible. Dealerships often use in-house financing that can be a bit limited. Heading to your own bank or credit union can offer a more affordable way to finance the vehicle you want.

Even if you choose dealer financing, your financial institution could refinance at a lower APR.

You can also refinance once your credit is in better shape if it was low when you bought your car. Taking this step could your overall payment, making your new car even more affordable.