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Looking for a new set of wheels? If you're like most Americans—over 80% of new car buyers, to be exact—you'll finance your new ride with an auto loan or lease. The next question becomes: Do you want a short-term or long-term car loan?
Since both options come with their own benefits and downsides, choosing the right auto loan term will likely come down to your financial needs and borrowing preferences. Let's break down the pros and cons of each to help you decide.
Pros of Short-Term Car Loans
A short-term car loan generally spans 24 to 60 months in 12-month increments and delivers benefits you may not find with longer-term options, such as the following.
Secure a Lower Interest Rate
When it comes to auto loans, the shorter the loan term, the lower the interest rate you may receive. Lenders tend to offer more favorable rates on shorter-term loans because there's less chance you'll default. Consequently, your total costs on the loan will be less than if you took on a longer-term car loan.
Pay Off the Car Sooner
One clear benefit of short-term loans is that you'll own your car outright sooner. The shorter the loan term, the faster you'll pay off the vehicle. With a 36-month loan, for example, you'll pay off the debt three years sooner than if you took out a 72-month loan.
Build Equity More Quickly
With most auto loans, you pay more interest upfront during the early months or years of the term, which slows how quickly you build ownership of the vehicle. However, short-term loans allow you to build equity faster because their higher payments pay down the principal balance faster than long-term loans. Building equity is important because it can help you avoid becoming underwater on the loan—owing more than the car is worth—which can make selling or trading it much harder.
Cons of Short-Term Car Loans
Short-term car loans offer numerous advantages, but there are also downsides to consider.
Make Higher Monthly Payments
Shorter-term loans give you less time to repay, so you'll make higher monthly payments to pay off the loan balance. Larger monthly payments could leave little room for other car-related expenses, like insurance, gas and routine maintenance, and could make it difficult to pay your other bills.
Have Less Budget Flexibility
Paying more toward your auto loan each month can impact your ability to save for emergencies, retirement or other financial goals. Even if you can afford the higher monthly payment, it's important to consider how it might affect your lifestyle and finances. A shorter loan may fast-track your path to ownership, but it's all for nothing if an unexpected emergency derails your finances and puts your vehicle at risk of repossession.
Learn more >> What's the Average Length of a Car Loan?
Pros of Long-Term Car Loans
Long-term auto loans typically range from over 60 months to 84 months, and some lenders even offer loans up to 96 months. Below are the advantages you might find with an extended car loan.
Get Cheaper Loan Payments
While you may pay more in total interest costs, longer-term loans typically have more affordable monthly payments since the balance is spread out over a longer period. As such, these loans may be more manageable and leave you with a buffer in your budget for emergencies.
Submit a Lower Down Payment
Longer-term loans typically come with lower down payment requirements that can help you get behind the wheel of your new car for less money upfront. Just remember, putting less money down means your loan amount will be higher, and you'll likely pay more interest over time.
Get a Higher Loan Amount
Lenders are often willing to extend larger loan amounts because the lower monthly payments reduce the strain on your budget and make it less likely you'll default. Even if a lender approves you for a large loan amount, you should never borrow more than you truly need and can comfortably afford each month.
Cons of Long-Term Car Loans
Be aware of the following disadvantages of long-term auto loans before committing to one.
Pay More in Interest
Lenders consider long-term loans riskier and consequently charge higher interest rates for them. You'll also spend more time paying down interest at the start of the loan before reducing the principal, adding to your loan's overall cost.
Higher Total Loan Cost
With a long-term auto loan, you face a double whammy—higher interest rates and a longer repayment period—both of which increase your total loan cost. You could end up paying significantly more over the life of the loan compared to a short-term loan.
Longer Timeline to Pay Off Car
The longer your car loan, the longer it'll take before you own the car free and clear. And with a long-term loan, your payments toward the principal are smaller and spread out over more years. It'll take longer for your loan balance to go down, increasing the likelihood that the car's value will drop below what you still owe. This negative equity can make it harder to sell your car while you're still paying off the loan.
Learn more >> How to Get a Car Loan
How Long Should I Finance a Car For?
The ideal car loan term for you depends on your financial situation, monthly budget and overall goals. If you can afford a car loan of 60 months or less, you'll save more over the life of the loan than if you had a loan with a longer term.
Consider the pros and cons of each loan term above and weigh your priorities. Is it more important to keep your monthly payments affordable, or would you prefer to save more money over the loan term? Understanding how each loan term could affect your budget and financial goals can help you decide the right term for you.
For example, you might opt for a short-term loan if you want to pay off your car faster and avoid long-term debt. If you can afford the higher monthly payment, you could save money on the total loan cost.
On the other hand, a long-term car loan may make sense if you have little upfront money for a car but your income is stable and sufficient enough to comfortably afford the higher loan amount and interest rate. Still, you'll need to be comfortable with carrying debt and taking longer to pay off the car if you choose this route.
Learn more >> How Can I Pay Off My Car Loan Faster?
Calculate Your Potential Monthly Payment
Experian's car payment calculator can be a valuable tool to help you compare monthly payments for both short-term and long-term loans. By entering a loan amount and interest rate, you can estimate total loan costs and see how much you'd spend with different terms.
Along those lines, let's take a look at how much interest you'll pay with average loan and interest rate terms. According to Experian's latest State of the Automotive Finance Market report, the average new car loan amount is $41,068, with borrowers paying an average APR of 6.61%.
Here's how those figures break down over four different loan terms.
| Loan Term | Monthly Payment | Total Interest Paid |
|---|---|---|
| 36 months | $1,260.75 | $4,319.02 |
| 48 months | $976.01 | $5,780.51 |
| 60 months | $805.66 | $7,271.61 |
| 72 months | $692.50 | $8,792.22 |
| 84 months | $612.03 | $10,342.19 |
| 96 months | $551.97 | $11,921.35 |
As you can see, your monthly payments on a 36-month car loan would be nearly double those of a 84-month term. However, you'd save $6,023 over the loan term with the shorter-term loan.
Reviewing the hard numbers can help you clearly see how different term lengths can affect your bottom line now and over the long haul.
How to Choose the Best Car Loan for You
Follow these five steps to help you identify the best car loan for your unique financial situation.
- Determine your budget. Review your monthly income and expenses to determine how much you can reasonably afford for a loan payment. If you have a good idea of what interest rate you may qualify for, use the car loan calculator as illustrated to dial in the perfect loan term for your budget.
- Review your credit. Your credit score is a primary factor in qualifying for a car loan and the interest rate you'll receive. Check your FICO® Score☉ for free with Experian to see where your credit stands. Your lender may use a different credit scoring model, but generally, the higher your credit score, the better.
- Consider adding a cosigner. If your credit could be better, you might consider applying with a cosigner in good credit standing. A creditworthy cosigner, such as a close friend or family member, may help you qualify for a lower interest rate, but they should be aware of the risks. Cosigners are responsible for making the loan payments if you can't and the debt will appear on their credit reports.
- Shop and compare lenders. Get quotes from banks, credit unions and online lenders to find the most favorable rates and terms. If you receive an attractive interest rate, get preapproved for the loan before heading to the dealership. You can ask the dealer to match or beat the offer if they want your business. They'll either offer you a better deal, or you can use your preapproved loan to finance the car.
- Apply for loans in a short window. An official loan application typically results in a hard inquiry on your credit report, which can temporarily drop your scores by a few points. But you can lessen the impact on your credit score if you submit your auto loan applications around the same time—typically within 14 to 45 days of one another depending on the scoring model.
Learn more >> Average Car Loan Interest Rates by Credit Score
Shore up Your Credit Before Applying for a Car Loan
According to Experian's third-quarter 2024 State of the Automotive Finance Market report, about 80% of new car buyers and 35% of used car buyers finance their purchases. If you plan on financing your car purchase, shop around and compare loans to help find the best interest rate for your preferred term.
Taking the time to strengthen your credit could help you qualify for lower rates resulting in more savings. Start by checking out your credit report and score for free with Experian and addressing any issues you discover. It can take a few months to improve your credit, so you might consider monitoring your credit to track your progress and stay on top of potential problems.