Like any other loan, a car loan comes with a specific duration, known as the loan term, during which you are expected to repay the borrowed amount. Choosing the right car loan length is a crucial decision that impacts your monthly payments and the total cost of your vehicle. Understanding How Long Is A Car Loan and the implications of different loan terms can empower you to make a financially sound choice.
Typical Car Loan Lengths
Car loan terms commonly range from 36 to 84 months, although shorter and longer options may exist depending on the lender and your specific circumstances. These figures represent the number of months you will be making payments on your car loan.
So, How Long Are Car Loans Exactly?
The length of a car loan, or its term, dictates your repayment schedule. Here are the most typical car loan terms you’ll encounter:
- 36 months (3 years)
- 48 months (4 years)
- 60 months (5 years)
- 72 months (6 years)
- 84 months (7 years)
Opting for a longer term reduces your monthly payment, providing more time to repay the loan. However, it also means you’ll accrue more interest over the life of the loan.
What is the Average Car Loan Length Today?
Currently, the 72-month car loan, or six-year loan, stands as the average car loan length for both new and used vehicles. This average has increased over the years, with 72 months becoming more prevalent than in previous decades.
The popularity of the 72-month term is likely due to the appeal of lower monthly payments compared to shorter-term loans like 60 months. As vehicle prices continue to rise, we may see even longer terms, such as 84-month loans, gain traction as buyers seek to manage their monthly expenses.
The Allure of Longer Car Loans: Advantages
Longer car loan terms offer several attractive benefits for car buyers, regardless of whether they are purchasing a new or used vehicle.
Lower Monthly Payments
The primary advantage of a longer loan term is significantly lower monthly payments. By spreading the total loan amount over an extended period, each individual payment becomes more manageable. This reduced financial burden makes car ownership accessible to a wider range of budgets and is a key reason why long-term loans are so popular.
Opportunity to Build Credit
For individuals looking to build or improve their credit score, a longer car loan term can be beneficial. Consistent, on-time payments over a longer duration demonstrate responsible credit management, positively impacting your credit history. While not the only way to build credit, the affordability of longer loan terms can make it an accessible option.
Affording a More Expensive Car
Lower monthly payments associated with longer loan terms can enable you to afford a more expensive vehicle than you might otherwise be able to. This can be particularly appealing if you have your sights set on a specific make or model that falls outside your budget with a shorter loan term.
The Flip Side: Disadvantages of Longer Car Loans
While longer car loans present certain advantages, it’s crucial to be aware of the potential drawbacks.
Higher Interest Costs
Longer loan terms inherently mean you will pay more interest over the life of the loan. Interest accrues over time, so extending the loan term allows for significantly more interest to accumulate. Furthermore, longer-term loans often come with higher interest rates compared to shorter-term options, further increasing the total cost of borrowing.
Depreciation Risk
Vehicles are depreciating assets, meaning their value decreases over time. With a longer loan term, there’s a higher likelihood that your car’s value will depreciate faster than you pay off the loan principal. This can lead to a situation where you owe more on the loan than the car is actually worth, known as being “upside down” or “underwater” on your loan.
Increased Risk of Default
Extending the loan term also increases the overall risk of default. Life circumstances can change unexpectedly over a longer period, making it more challenging to consistently meet your monthly payments. Defaulting on a car loan can have severe consequences, including damage to your credit score and potential vehicle repossession.
The Case for Shorter Car Loans: Advantages
Shorter car loans, while perhaps requiring higher monthly payments, offer compelling advantages that mitigate the drawbacks of longer terms.
Lower Overall Interest
The most significant benefit of a shorter car loan is the substantial savings on interest. Shorter loan terms typically come with lower interest rates, and crucially, less time for interest to accumulate. This can translate to saving thousands of dollars in interest payments over the loan’s lifetime, making your car ownership significantly cheaper in the long run.
Reduced Financial Risk
Shorter loan terms inherently carry less financial risk. As mentioned earlier, cars depreciate. With a shorter loan, you are less likely to find yourself in an underwater loan situation. This provides greater financial security should you need to sell the car or if it’s totaled in an accident.
Faster Debt Freedom
A shorter car loan term means you’ll pay off your debt much faster. This provides financial freedom sooner, allowing you to allocate those funds to other financial goals, such as saving, investing, or paying off other debts. Furthermore, avoiding long-term car loan debt allows for more flexibility in future car purchases, preventing a cycle of continuous car loan payments.
The Trade-offs: Disadvantages of Shorter Car Loans
While generally financially advantageous, shorter car loans do have a few drawbacks to consider when deciding how long is a car loan term that suits you.
Higher Monthly Payments
The most significant hurdle with shorter car loans is the substantially higher monthly payments. Compressing the loan repayment into a shorter timeframe naturally increases the amount you need to pay each month. This can strain your monthly budget and may make it seem less affordable initially.
Larger Down Payment May Be Needed
To compensate for higher monthly payments with a shorter loan term, you might need to make a larger down payment. A larger down payment reduces the total loan amount, thereby bringing the monthly payments down to a more manageable level. However, requiring a larger upfront cash outlay can be a barrier for some buyers.
Potentially Limited Car Choice
If you are constrained by a strict monthly budget, opting for a shorter car loan might limit the type or price range of vehicles you can realistically afford. The higher monthly payments associated with shorter terms may push you towards less expensive car options to stay within your budget.
Finding Your Ideal Car Loan Length
Choosing the right car loan length is a balancing act. There’s no one-size-fits-all answer to how long is a car loan should be, as the optimal term depends on your individual financial situation and priorities.
Key Considerations:
- Longer Loan Terms: Offer lower monthly payments and increased affordability but result in higher overall interest costs and greater financial risk due to depreciation and potential default.
- Shorter Loan Terms: Require higher monthly payments but minimize interest paid and reduce financial risk, leading to faster debt freedom and cheaper car ownership in the long run.
Generally, the best approach is to opt for the shortest car loan term you can comfortably afford within your budget. To determine the ideal loan length for you, carefully assess your income, savings, monthly expenses, and the price of the car you intend to purchase. Consider using online car loan calculators to estimate monthly payments for different loan terms and interest rates to make an informed decision.
Conclusion
Understanding how long is a car loan and the implications of different loan terms is essential for making a smart financial decision when financing a vehicle. While the allure of lower monthly payments with longer loans can be tempting, it’s crucial to weigh the long-term costs and risks. Prioritizing a shorter loan term, if feasible, can save you significant money on interest and provide greater financial security in the long run. Remember to carefully evaluate your financial situation and choose a loan term that aligns with your budget and financial goals.
