What Is a Car Loan Term?
The loan term is the length of time you have to repay an auto loan, generally expressed in months. Common terms range from 36 to 84 months, with longer terms becoming increasingly popular.
A shorter loan term reduces total loan cost, while a longer loan term reduces monthly payments but increases total interest paid over the life of the loan. Longer terms also increase the risk of negative equity, where you owe more on the vehicle than it is worth.
- Term length is a key factor in your monthly payment and total interest.
- Shorter terms (36-48 months) typically have higher monthly payments but lower overall cost.
- Longer terms (72-84 months) lower monthly payments but add thousands in interest.
Sources: Consumer Financial Protection Bureau
Common Car Loan Terms Available
Auto loan terms typically range from 36 to 84 months, though some lenders may offer shorter or longer periods. The most common term for new cars is 72 months, with the average new-car loan term around 68 months as of 2024.
Here are the most common terms and their typical characteristics based on market data:
- 36 months: Shortest common term; monthly payments are highest but total interest is lowest.
- 48 months: A balance of manageable payments and moderate interest cost.
- 60 months: Popular for its affordability; still considered a reasonable length by many experts.
- 72 months: The most common term for new cars; significantly lower monthly payments but more interest.
- 84 months: Longest common term; lowest monthly payments but highest total interest and greater negative equity risk.
Sources: Pacific Service Credit Union, Investopedia
How Term Length Affects Monthly Payments
Monthly payments are lower with longer terms because the loan balance is spread out over more months.
This trade-off makes longer terms appealing for budget-conscious buyers, but it is important to remember that the total interest paid will be higher.
- Longer terms mean smaller monthly payments, making a more expensive car potentially affordable.
- However, the longer you take to pay, the more you pay in interest overall.
- Use an auto loan calculator to compare exact monthly payments for different terms.
Sources: Consumer Financial Protection Bureau
How Term Length Affects Total Interest Paid
A longer loan term generally increases the total interest paid over the life of the loan. The same $20,000 loan at 4.75% illustrates this clearly:
With a 36-month term, total interest is $1,498. Over 72 months, it jumps to $3,024 – more than double. This pattern holds for other loan amounts and rates.
- Total interest rises as the term lengthens, even if the interest rate stays the same.
- For example, a $40,000 loan at 6.5% costs $4,135 in interest over 36 months but $9,894 over 84 months.
- Longer terms also increase the chance of negative equity, as the car depreciates faster than the loan balance decreases.
Sources: Consumer Financial Protection Bureau, Bankrate
Trade-offs Between Short and Long Terms
Short terms (36-48 months) minimize total interest and help you build equity quickly, but they require a higher monthly payment. Long terms (72-84 months) make payments more affordable but cost significantly more in interest and can leave you owing more than the car is worth for a longer period.
The right choice depends on your budget and financial goals. If you can comfortably afford a shorter term, you'll save money. If you need a lower payment, a longer term might be necessary, but you'll pay a premium.
- Short-term pros: lower total interest, less negative equity risk, quicker payoff.
- Short-term cons: higher monthly payment, may strain your budget.
- Long-term pros: lower monthly payment, allows you to afford a newer or more expensive car.
- Long-term cons: higher total interest, greater negative equity risk, may cost more over time.
Sources: Consumer Financial Protection Bureau
Examples for Different Loan Amounts
To illustrate the impact of term length, consider the following examples based on typical loan amounts and rates. These are illustrative figures, not current market offers.
| Loan Amount / APR | 36 months | 48 months | 60 months | 72 months | 84 months |
|---|---|---|---|---|---|
| $20,000 at 4.75% | $597 / $1,498 | $458 / $1,999 | $375 / $2,508 | $320 / $3,024 | — |
| $40,000 at 6.5% | $1,226 / $4,135 | $949 / $5,533 | $783 / $6,959 | $672 / $8,413 | $594 / $9,894 |
| $35,000 at 9% APR (no down payment or trade-in) | $1,113 / $5,068 | $871 / $6,807 | $727 / $8,593 | $631 / $10,424 | $563 / $12,302 |
Sources: Consumer Financial Protection Bureau, Bankrate, NerdWallet
Tips for Selecting the Right Term
Choosing a car loan term involves weighing your monthly budget against the total cost of the loan. Here are practical tips to guide you:
- Consider a term of 60 months or less if possible, as some financial experts recommend auto loans be five years or less.
- Use an auto loan calculator to compare monthly payments and total interest for different terms before visiting a dealer.
- Make a larger down payment to reduce the amount you need to finance, which can make a shorter term more affordable.
- Shop around for rates; a lower interest rate can make a longer term less costly, but the total interest will still be higher than a shorter term at the same rate.
- Factor in the risk of negative equity with longer terms – you may owe more than the car is worth for several years.
Sources: Consumer Financial Protection Bureau
Frequently asked questions
How does the term affect my interest rate?
The term length can influence your interest rate, but the relationship is not straightforward. Different lenders may offer different rates for different terms, so it is best to compare loan offers from multiple lenders to see which term and rate combination works for you. The examples provided in this guide use fixed rates to isolate the effect of term length on monthly payments and total interest.
Sources: Consumer Financial Protection BureauIs a 72-month car loan ever a good idea?
A 72-month loan can be a good idea if you need a lower monthly payment and plan to keep the car for a long time. However, it will cost you more in total interest compared to a shorter term. For example, on a $40,000 loan at 6.5%, a 72-month term costs $672 per month and $8,413 in interest, while a 60-month term costs $783 per month and $6,959 in interest. If you can afford the higher payment, a shorter term is generally better financially.
Sources: Bankrate, Consumer Financial Protection BureauSources
- How do I compare auto loan offers? | Consumer Financial Protection Bureau — Consumer Financial Protection Bureau
- Auto loans key terms - Consumer Financial Protection Bureau — Consumer Financial Protection Bureau
- What’s the average car loan length? — Bankrate
- What’s the Average Car Loan Length? - NerdWallet — NerdWallet
- Understanding Interest Rates on Car Loans — Investopedia
- Understanding Car Payments | CA Auto Loans | Pacific Service CU — Pacific Service Credit Union