Many drivers finance a new or used vehicle with a car loan. But before taking a loan, you need to decide how much money you want to borrow and for how long you want to take the loan. The term of your loan will affect things like your interest rate and your monthly payments.
While there is no “average” car loan term, you can usually choose to pay off the loan in between 24 and 84 months. The right loan term for you depends on your individual situation. Here’s what to consider when choosing an auto loan length.
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How long is a normal car loan?
Pinpointing the average car loan length is difficult. However, loan terms of between three and five years are quite common. Loans within this time frame often have reasonable interest rates and monthly payments, but it all depends on what loan terms you qualify for.
Most auto loans are available in 12-month increments. You can typically find lenders offering loan terms as long as 24, 36, 48, 60, 72 and 84 months. However, longer and shorter loan terms are also available from some lenders.
Reasons to choose longer loan tenure
The biggest reason to choose a longer loan term is to lock in a lower monthly payment. Even though the payments are spread over a long period of time, each payment is small.
Let’s say you’re financing a $30,000 car over five years at 3 percent APR with no down payment and no sales tax. Monthly payment will cost approximately $539 per month. If you decide to take a seven-year loan instead, you’ll pay $396 per month. This $143 difference can have a significant impact on your monthly budget.
While a longer loan term may be more affordable, keep in mind that you’ll be paying more money in interest. It’s a good idea to compare the interest payments on a short-term loan versus a long-term loan before choosing one.
negative equity and long car loans
The longer you own a vehicle and the more miles you put on it, the less it will cost. During any loan term, a car is depreciating in value. However, longer term loans can actually cause you to pay more for your vehicle than it is worth.
Opting for a long-term car loan increases your chances of having negative equity in the vehicle, which occurs when you pay more than the car is worth. This is also known as being “underwater” or “upside down” on your loan.
While negative equity isn’t necessarily a bad thing, it does have some consequences, especially around selling or trading in your vehicle. If you have negative equity in your vehicle, it is much harder to sell or trade in your car without paying off the loan first.
There are ways to avoid negative equity, such as making a larger down payment. However, choosing a shorter loan tenure can also help you avoid this.
how to get a lower monthly loan payment
Monthly car payments can get expensive, even if you choose a long-term loan. These strategies can help you lock in lower monthly payments, regardless of the loan term you choose.
- Make a bigger down payment: Making a larger down payment reduces the amount you can borrow, which means you may be able to get a lower monthly payment. It also helps you avoid negative equity.
- Improve your credit score: To get the best loan terms, work on improving your credit score. Lenders are more likely to offer lower interest rates to borrowers with good credit.
- Lease instead of buying: Car rental may be a more affordable, less risky option for some drivers. Some leases have lower monthly payments than auto loans, and you get to drive a new or nearly new car. You also have the option of purchasing the vehicle after your lease term is over.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. He has extensive knowledge of various insurance lines including car insurance and property insurance. His byline has appeared in dozens of online finance publications such as The Balance, Investopedia, Review.com, Forbes and Bankrate.