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Financing a car isn’t getting cheaper. With average payments exceeding $500 per month, even for used cars, it’s no wonder that loan terms among most borrowers now average more than 60 months.
With car prices continuing to rise next to other costs, it’s getting more difficult for many buyers to afford a 60-month loan—at one point the norm for auto loan borrowers. Since 2020, the number of borrowers taking out 60-month loans has dropped almost 6%, while those taking out loans upward of 73 months have gone up nearly 11% in the same time frame.
While you can finance a car for nearly a decade, that doesn’t always mean you should. Here’s what your auto loan term means to you right now and over the total life of your loan.
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How Do You Finance a Car?
If you don’t have enough cash on hand to buy a car outright, which most people don’t, you can take out a car loan. If you go this route, your lender pays the dealer for the cost of the car, and you make monthly payments to the lender until your loan is repaid.
When you apply for an auto loan, your eligibility is based on factors like your credit score, debt-to-income (DTI) ratio and how much money you’re borrowing. Once approved, your monthly payment never changes; a portion of each payment goes to interest and the rest goes to your principal amount (the original amount you borrowed). There’s a chance the loan amount you’re approved for is less than the cost of the car you’re financing.
How Long Can You Finance a Car?
You can finance your car for as little as a few months to more than 84 months—or seven years. The most common length is 72 months—or six years—followed by 84 months.
The longer your loan term, the lower your monthly payments, but the higher the overall interest. Shorter terms, on the other hand, mean higher monthly payments, but you’ll pay off your car sooner and owe less interest.
In most cases, you can finance a car as long as you need to, if your lender and dealership agree to those terms. You have more say if you have excellent credit and a proven history of on-time payments and reliable income. If you have poor credit and low income, you may not have as much leverage during car-buying negotiations.
Pros and Cons of a Long-term Car Loan
Make sure to weigh the pros and cons of a long-term car loan before applying for one.
Pros of a Long-term Car Loan
- Low monthly payments: For borrowers who don’t have a large monthly budget they can put toward a car payment, longer terms might be the most affordable option.
- Lower risk of default: The more affordable your car payment, the less likely you are to fall behind on payments. If you fall behind on payments, your car could get repossessed and your credit score could be severely impacted, hurting your chances of borrowing in the future. On-time payments play a major part in a strong credit score.
Cons of a Long-term Car Loan
- Higher interest: Long-term car loans typically come with higher interest rates. Not only that, you’ll pay more in interest over the life of the loan, simply because you’re in debt for longer.
- Decreased value: Because longer loan terms are more expensive, by the time you’ve paid off your car, you might have forked over more than the car was ever worth. It also takes you longer to build equity in your car, so if you want to resell the vehicle before your debt is paid, you could lose money.
What Do You Need to Finance a Car?
When you’re preparing to finance a car, keep these details in mind:
- Income. Lenders want to see that you’ll be able to afford the monthly loan payment. You may need to show proof of income from your day job, side hustle and any assistance you get from the government.
- Down payment. If you’re trading a car in, you can use that as a partial down payment on the new vehicle. If not, you might need to save a down payment fund first. The larger your down payment, the less you need to borrow. In some cases, a down payment isn’t required to buy a car, but it can help your approval odds.
- A solid credit score. The higher your credit score, the lower your interest rate will be. Paying off outstanding debt and keeping your DTI ratio low can improve your chances of receiving more favorable rates. If you don’t have a great credit score, consider applying with a co-signer with good or excellent credit.
- Rate-shopping. It’s not a requirement to rate shop, but it’s a good idea to do it. Compare multiple auto lenders to get the best rate available for your circ*mstances. If you have the time and resources, you might want to get preapproved by your bank or credit union rather than get financing through the dealership.
Short-term vs. Long-term Auto Loan: Which Is Best?
The best loan terms are the ones that fit your specific needs. If you’re weighing your options, use an auto loan calculator to estimate what you can afford.
For example, say you borrow $25,000 to buy a car with a 4.99% interest rate. Here’s what you’ll pay in interest based on your loan terms.
| Loan term | Monthly payment | Total interest paid |
|---|---|---|
| 36 | $749.16 | $1,969.76 |
| 48 | $575.62 | $2,629.76 |
| 60 | $471.67 | $3,300.20 |
| 72 | $402.51 | $3,980.72 |
| 84 | $353.23 | $4,671.32 |
If you can afford to pay off your loan faster with larger monthly payments, you should choose the shortest terms possible. But if you run the risk of falling behind on payments, longer terms are more responsible.
Compare Rates and Save on Your Auto Loan
Get up to 4 loan offers in minutes at myAutoloan.com.
