Many drivers finance a new or used vehicle with a car loan. But before you take out a loan, you’ll need to decide how much money you need to borrow and how long you want the loan to last. The length of your loan will affect things like your interest rate and your monthly payment.
While there is no “average” car loan length, you can typically choose to pay off the loan between 24 and 84 months. The right loan term for you depends on your personal situation. Here’s what to consider when choosing an auto loan length.
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How long is a normal car loan?
It is difficult to determine the average length of the car loan. However, loan terms between three and five years are quite common. Loans within this time frame often have reasonable interest rates and monthly payments, but it all depends on what loan terms you can qualify for.
Most car loans are available in 12-month intervals. You can usually find lenders that offer loan terms that are 24, 36, 48, 60, 72 and 84 months long. However, longer and shorter loan terms are also available with certain lenders.
Reasons to choose a longer loan term
The biggest reason to choose a longer loan term is to include a low monthly payment. Even though the payments are spread over a longer period of time, 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 difference of $143 can make a significant impact on your monthly budget.
While a longer loan term may be more affordable, keep in mind that you will pay more money in interest. It’s a good idea to compare the interest payments on a long-term loan with a short-term loan before choosing one.
Negative equity and long car loans
The longer you own a vehicle and the more miles you put on it, the less it’s worth. During any loan period, a car depreciates in value. However, long-term loans can actually cause you to pay more for your vehicle than it is worth.
Choosing a long-term car loan increases the likelihood that you will have negative equity in the vehicle, which happens when you owe more than the car’s value. This is also known as “underwater” or “upside down” 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 first paying off the loan.
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 a lower monthly loan payment
Monthly car payments can be expensive, even if you choose a long-term loan. These strategies can help you lock in a lower monthly payment 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 on improving your credit score. Lenders are more likely to offer lower interest rates to borrowers with good credit.
- Rent instead of buy: Renting a car can be a more affordable, 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 buy the vehicle after your lease term ends.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.
