Many drivers finance new or used vehicles with car loans. But before you take out a loan, you need to decide how much money you need to borrow and how long you want the loan to last. The term of your loan will affect things like your interest rate and your monthly payments.
While there is no “average” car loan length, you can usually choose to pay off the loan between 24 and 84 months. The loan term that is right for you depends on your personal situation. Here are the things to consider when choosing the length of a car loan.
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How Long Is a Typical Car Loan?
It is difficult to determine the average length of a car loan. However, loan terms between three and five years are common. Loans during this period often have reasonable interest rates and monthly payments, but it all depends on the terms of the loan you qualify for.
Most car loans are available in 12-month increments. You can usually find lenders that offer loan periods of 24, 36, 48, 60, 72, and 84 months. However, longer and shorter loan periods are also available from certain lenders.
Reasons for Choosing a Longer Loan Term
The biggest reason for choosing a longer loan term is to lock in a low monthly payment. Although the payments are spread over a longer period, each payment is smaller.
Let’s say you finance a $30,000 car over five years at 3 percent APR with no down payment and no sales tax. Monthly payments will cost about $539 per month. If you decide to opt for a seven-year loan instead, you’ll make payments of $396 per month. This $143 difference can have a significant impact on your monthly budget.
While a longer loan term can be more affordable, keep in mind that you will pay more money in interest. It’s a good idea to compare interest payments on long-term loans versus short-term loans before you choose one.
Negative Equity and Long Term Car Loans
The longer you own the vehicle and the more miles you use, the less value it has. During any loan period, the car depreciates more and more. However, a long-term loan can actually cause you to pay more for your vehicle than you should.
Choosing a long-term car loan increases the likelihood that you will have negative equity in the vehicle, which occurs when you owe more than the car is worth. It is also known as being “under water” or “inverted” on your loan.
While negative equity isn’t necessarily a bad thing, there are some consequences, especially around selling or trading in your vehicle. If you have negative equity in your vehicle, it is very difficult 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 term can also help you avoid this.
How to Get Lower Monthly Loan Payments
Monthly car payments can be expensive, even if you choose a long-term loan. This strategy can help you lock in lower monthly payments, regardless of the loan term you choose.
- Make a large down payment: Making a large down payment reduces the amount of money you have to 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 to improve your credit score. Lenders are more likely to offer lower interest rates to borrowers with good credit.
- Lease instead of buying: Leasing a car can be a more affordable and less risky option for some drivers. Some leases have lower monthly payments than car loans, and you can drive a brand new or nearly new car. You also have the option to purchase the vehicle after your lease period ends.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.