Like any other loan, car loans come with a specific repayment timeframe, known as the loan period or term. Selecting the right car loan period is a crucial decision that impacts your monthly payments and the total interest you’ll pay over the life of the loan. Finding the sweet spot often means balancing lower monthly payments with minimizing overall interest costs and ensuring the loan remains affordable throughout its duration.
Typical Car Loan Lengths Explained
Car Loan Periods typically range from 36 to 84 months, although shorter and longer terms exist. Some lenders also offer loan lengths that fall outside these standard ranges.
Common Car Loan Terms: How Long Are Car Loans?
The term of a car loan dictates how long you’ll be making payments. Here are the most common car loan terms you’ll encounter:
- 36 months (3 years): A shorter term, leading to quicker ownership.
- 48 months (4 years): A balanced term, offering moderate monthly payments and interest.
- 60 months (5 years): A very common term, striking a balance for many borrowers.
- 72 months (6 years): Increasingly popular for lower monthly payments.
- 84 months (7 years): The longest common term, resulting in the lowest monthly payments but highest overall interest.
It’s important to remember that while longer terms give you more time to repay the loan, they also allow more time for interest to accumulate, increasing the total cost of borrowing.
The Average Car Loan Length Today
Currently, the 72-month car loan is the most common term for both new and used vehicle purchases. The average car loan length has gradually increased over time, with 72 months becoming more prevalent than in previous decades.
The rising popularity of the 72-month term is likely driven by its appeal for lower monthly payments. Spreading payments over a longer period makes car loans more accessible in terms of monthly budgeting. Looking ahead, it’s possible that 84-month loans may become even more common as buyers seek even lower monthly payment options.
The Pros and Cons of Long Car Loan Periods
Longer car loan periods, such as 72 or 84 months, offer advantages that attract many car buyers, whether they are financing a new or used vehicle.
Advantages of Longer Car Loan Terms
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Reduced Monthly Payments: The primary benefit of a long-term car loan is significantly lower monthly payments. By extending the repayment period, the amount due each month becomes more manageable, making it easier to fit car payments into your budget. This is a major reason why long-term loans are popular.
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Credit Building Opportunities: For individuals looking to build or improve their credit history, a longer car loan can be a useful tool. Consistent, on-time payments over an extended period demonstrate responsible credit management and can positively impact your credit score. While not the only way to build credit, the lower monthly payments associated with long-term loans can make this process more accessible.
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Access to a Better Vehicle: Lower monthly payments can expand your car-buying options. With a longer loan term, you might be able to afford a more expensive or better-equipped car than you could with a shorter-term loan, allowing you to get the vehicle that truly meets your needs and desires.
Drawbacks of Longer Car Loan Terms
While long car loan periods offer enticing benefits, it’s crucial to consider the downsides:
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Higher Total Interest Costs: Longer loan terms mean more time for interest to accrue. Furthermore, longer loans often come with higher interest rates compared to shorter-term loans. This combination results in significantly more interest paid over the loan’s life, increasing the total cost of your car.
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Depreciation Risk and Underwater Loans: Vehicles depreciate in value over time. With a longer loan term, there’s a higher chance that your car’s value will fall below the outstanding loan balance, meaning you could owe more than the car is worth. This situation, known as being “underwater” or “upside down” on your loan, can create financial difficulties if you need to sell or trade in your vehicle.
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Increased Risk of Default: A longer repayment period increases the overall risk of defaulting on the loan. Life circumstances can change over several years, and unexpected financial challenges could make it difficult to keep up with payments, potentially leading to vehicle repossession.
These drawbacks often make shorter loan terms a more financially sound choice, despite the appeal of lower monthly payments offered by longer terms.
The Benefits of Short-Term Auto Loans
While long-term car loans are popular, short-term car loans offer distinct advantages by mitigating the drawbacks associated with longer repayment periods.
Advantages of Shorter Car Loan Terms
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Lower Overall Interest Paid: The most significant advantage of a short-term car loan is the substantial savings on interest. Shorter terms typically come with lower interest rates, and the shorter repayment period means less time for interest to accumulate. This can translate to saving thousands of dollars in interest over the loan’s life, reducing the total cost of your vehicle significantly.
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Reduced Financial Risk: Short-term car loans inherently carry less financial risk. As mentioned earlier, vehicles depreciate. With a shorter loan, you’re less likely to find yourself in an underwater loan situation. This provides financial security and flexibility if you need to sell your car or if it’s totaled in an accident.
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Faster Debt Repayment: Shorter loan terms allow you to become debt-free much sooner. You’ll pay off your car loan quicker and own your vehicle outright sooner, freeing up cash flow and eliminating monthly car payments. This can be particularly beneficial for those who prefer to minimize debt and gain financial freedom faster. Furthermore, if you tend to replace your car every few years, a shorter loan term prevents you from constantly being in a cycle of car loan payments.
Drawbacks of Short-Term Auto Loans
Despite their financial advantages, short-term car loans also have potential drawbacks:
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Higher Monthly Payments: The most significant downside is higher monthly payments. To repay the loan in a shorter timeframe, you’ll need to make larger payments each month, which can strain your monthly budget.
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Larger Down Payment May Be Required: To manage the higher monthly payments of a short-term loan, you might need to make a larger down payment upfront to reduce the loan amount and bring monthly payments to a more manageable level.
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May Limit Car Choice: The higher monthly payments associated with short-term loans might restrict the type of car you can afford. You may need to choose a less expensive vehicle to keep monthly payments within your budget when opting for a shorter loan term.
Choosing the Right Car Loan Period for Your Situation
Selecting the ideal car loan period involves carefully weighing the advantages and disadvantages of both long and short terms in relation to your individual financial situation and car-buying goals.
When deciding on your loan term, consider these key points:
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Longer loan terms result in lower monthly payments and increased affordability in the short term but lead to higher total costs and greater financial risk over the loan’s life.
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Shorter loan terms require higher monthly payments but minimize interest costs and reduce financial risk in the long run.
Ultimately, the best car loan period is typically the shortest term you can comfortably afford while maintaining a healthy financial balance. To determine the right term for you – whether it’s 36, 48, 60, 72, or 84 months – carefully assess your income, savings, monthly expenses, and the price of the car you intend to purchase. Prioritize minimizing the total cost of your car loan while ensuring the monthly payments fit comfortably within your budget.
