The average length of a car loan is 72 months or six years. However, the length of car loans can vary from as short as 12 months to as long as 96 months. Most lenders offer a range of car loan lengths in 12-month increments.
A shorter-term loan has higher monthly payments, but borrowers pay less interest throughout the loan. Longer-term loans have lower monthly payments but garner more interest. The right length of loan depends on a borrower's financial circ*mstances.
Key Takeaways
- The average length of a car loan is 72 months or six years.
- Most car loan lenders offer a range of loan terms in 12-month increments.
- A shorter-term car loan comes with higher monthly payments but may save thousands of dollars in interest.
Pros and Cons of Longer Car Loans
Most auto loan lenders offer a range of options for the length of auto loans. Both long- and short-term loans have advantages and disadvantages.
Advantages of Longer-Term Car Loans
- Lower monthly repayments that may be easier to afford.
- Making regular, on-time payments can be a good way for a borrower to improve their credit score.
- Lower monthly payments may allow borrowers to afford a more expensive car than they could with a shorter-term loan.
Disadvantages of Longer-Term Car Loans
- Longer-term car loans are more expensive because they tend to have higher interest rates with more time for interest to accrue.
- Vehicles depreciate over time, so borrowers might pay more than the car is worth with a longer-term loan.
Pros and Cons of Shorter Car Loans
Shorter-term car loans can be a better option if borrowers can comfortably afford the monthly payments.
Advantages of Shorter-Term Car Loans
- Shorter-term car loans may be cheaper, commonly with lower interest rates and less time for interest to accrue.
- Shorter-term car loans mean the vehicle will have less time to depreciate throughout the loan period.
- Borrowers get out of debt more quickly.
Disadvantages of Shorter-Term Car Loans
- Shorter-term car loans have higher monthly payments, so borrowers should be able to afford them.
- Lenders may also require a larger down payment with a shorter loan.
Longer vs. Shorter Car Loan
Before taking out an auto loan, borrowers should understand all the costs. While an 84-month loan might look affordable due to lower monthly payments, it will cost more in the long term than a 36-month loan for the same amount.
Suppose a borrower takes a loan for a car worth $35,000, with a $7,000 down payment and an 11% interest rate.
- Over 84 months, the monthly payment will be $479.43 for seven years, and the borrower will pay $12,271.97. The total loan will cost $40,271.97.
- Over 36 months, the monthly payment will be $916.68, but borrowers will only pay $5,000.63 in interest. The total cost of the loan will be $33,000.63.
- By choosing a shorter loan period, borrowers save $7,271.34.
How to Decide the Length of a Car Loan
The general rule for borrowers is to get the shortest loan they can afford, given the monthly payment amount. Although the monthly amount is higher, borrowers can save money in the long term.
Missing a car loan payment can decrease a borrower's credit score, which can cause longer-term problems with finances. Borrowers who can’t afford a large down payment or larger monthly payments should probably choose a longer-term car loan.
Borrowers might consider other debt when deciding the length of a car loan. If a car loan has a lower interest rate than other debt, it may be better to use extra funds toward the higher interest-rate debt instead of a higher auto loan payment.
What Is More Affordable—a Long- or Short-Term Car Loan?
A longer-term car loan is more affordable monthly, offering lower monthly payments. However, a shorter-term car loan will cost borrowers less throughout the loan. A shorter-term car loan may have a lower interest rate, making it even more affordable.
What Is the Oldest Car That a Bank Will Finance?
Typically, a bank won’t finance any vehicle older than ten years, even if a borrower has good credit.
Can Borrowers Pay Off a Car Loan Early?
Lenders earn interest with each car loan payment. Borrowers can usually pay a car loan off early based on the loan terms, but some lenders may charge a penalty, a prepayment fee, for an early payoff.
Will Paying Off a Car Loan Improve a Borrower's Credit?
A consumer's credit score is commonly based on their payment history, credit utilization, and credit history. A borrower who makes consistent, timely monthly payments on a car loan will show a positive payment history reflected on their credit report, which can improve the borrower's score over time. The account is closed once the loan is paid and will no longer impact the borrower's credit rating.
The Bottom Line
Most car loan lenders offer a range of loan terms, ranging from 12 months to 96 months. A longer-term car loan will have lower monthly repayments, but it will be much more expensive overall because there is more time for interest to accrue. A shorter-term car loan is more expensive each month but will save borrowers interest costs.
