What's the Best Car Loan Length? All Your Questions Answered

Are you about to get a loan for a new car? Something that’s going to come up in conversation is the “loan term”. You may be willing to just leave it at whatever the dealer proposes but be careful! Because the loan term is actually one of the most important factors in negotiations and In this article we’ll explain why you should be choosing the best car loan length.

What Are Car Loan Terms?

To put us simply, a loan term is the amount of time that you are agreeing to pay off the loan, usually in periods of 12 months. Each month you will make a pre-calculated payment based on the total amount of the loan divided by the term + interest.

 

 

The most common loan terms are 48-72 months (4-6 years). However, depending on the situation you can go as high as 96 months on some loans.

 

Why Do Car Loan Lengths Matter?

There are 2 key factors that are going to be affected by the loan terms, The first is your monthly payments. The longer your loan term is the lower the amount you’ll have to pay each month as the loan is being decided across more months.

 

The second however is the complication of interest. Since interest is also applied to the loan monthly by choosing a longer loan period you’ll end up spending more money on the loan.

 

Your best car loan length needs to be based on balancing these two factors, a classic question of time vs money.

 

Pros of Longer Car Loan Lengths

There are definite upsides to longer auto loans.

 

Borrow More: Longer loans stretch the loan principal out for longer, meaning you can borrow more while keeping payments sensible.

 

Buy a Better Car:  Borrowing more means you can afford a better or newer car with that extra money.

 

Lower Monthly Payments: Or you could borrow less and have lower monthly payments, making the entire loan more affordable.

 

Cons of Longer Car Loan Lengths

There are disadvantages to longer auto loans though.

 

More Expensive: Loan interest is paid monthly so the more months you have the loan, the more interest payments you’ll make.

 

Higher Likelihood of Going Upside Down: If you buy new, you’ll likely be upside down for longer as payments will be lower and it will take slightly longer to rebalance the loan.

 

Lower Resale Value: The longer it takes to pay off the car, the less it will be worth once you’re done.

 

Paying for Longer: One of the best things about an auto loan is when it comes to an end. That will be a long time with a longer auto loan!

 

Pros of Shorter Car Loan Lengths

There are upsides to shorter auto loans too.

 

Paid Faster: You could be driving your car while still relatively new and it would be all paid off.

 

Lower Interest: The shorter the loan, the fewer interest payments you’ll have to make, so it’s cheaper over the term.

 

Upside Down for Less Time: If you buy new, you’ll be upside down for much less time, if at all

 

Car Worth More: Pay the loan off faster and the car will be worth more when it comes time to trade in or up.

 

Cons of Shorter Car Loan Lengths

There are also downsides to shorter auto loans.

 

Higher Monthly Payments: Unless you’re borrowing considerably less, your monthly payments will be higher to pay everything off in a shorter time.

 

May Need Larger Down Payment: To balance the extra expense of a shorter loan, you may require a larger down payment.

 

Higher Interest Rates: Unless you shop carefully, shorter loans can often charge higher rates so the lender makes more profit.

 

What’s The Best Loan Term?

Your loan term decision needs to be tailored to your current financial situation, therefore the is no one best car loan length for everyone. As a general rule, you want to be paying as much as you can per month without crippling yourself financially.

 

48-60 months usually works out as that balance for most people, however, if you’re in a more desperate situation then it may make more financial sense to take a longer loan and eat the extra interest so that you can afford the monthly payments at a reasonable rate.

 

Some lenders prefer certain loan periods and may offer incentives to choose those periods like a lower interest rate, It’s worth looking into these offers and doing the math to see if they really do offer a better deal.

 

Once you choose a loan term you aren’t locked in it forever. Should your financial situation improve and you’re able to make higher monthly payments it’s well worth considering refinancing the loan.

 

 

Refinancing is a process where you can renegotiate the loan terms to get a better rate of interest, a more agreeable loan term, or ideally both.

 

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