How Long Should Your Car Loan Be?

Last year, Experian Automotive released their data on the lengths of automobile loans. Both new car loans and used car loans reached record highs, with new cars averaging 67 months and used cars averaging 62 months. So how long should your car loan be?

 

Why Are Car Loans Longer?

 

It’s probably worth looking at the reason for the increase in car loan terms, and the primary reason is cost. New car prices have increased 4.5 percent over just the last year, making the new average new car cost around $29,000.

 

Is this affordable? Well that depends. Here’s a quick comparison of monthly payments based on length of the car loan (no money down, interest rates may vary by location and credit standing):

 

Term Interest Rate Monthly Payment Total of Payments
36 months 2.00% $830.63 $29,902.85
48 months 2.30% $632.96 $30,382.22
60 months 2.40% $513.40 $30,803.75
72 months 2.75% $437.38 $31,491.41

 

The differences are pretty significant. There’s nearly a $400 per month difference in the 36 month loan compared to the 72 month loan. If you’re on a budget, that $437 per month payment looks a lot more attractive.

 

What’s the Downside to Longer Loans?

 

There are a couple of other things to look at, though. It’s easy to see that interest rates go up as the loan term gets longer (and keep in mind, these interest rates will likely go up even more for a used car loan, and many lenders won’t offer the option of 72 months). That means the longer your loan, the higher your total purchase price. The difference between 36 months and 72 months is nearly $1,600 – no small piece of change.

 

Also, because of rapid new car depreciation, most buyers are “upside-down” almost immediately, meaning they owe more than their new car is worth. The longer the loan term, the longer you’ll be upside-down. If your car should get totalled, you could still be on the hook for payments for a car you can’t drive (GAP insurance can help here, as well as having a significant down payment).

 

Finally, while cars are generally much more durable than in days past, they all eventually need repairs. If your car payments are stretched out over a longer time, the chances of needing to pay for repairs while still making monthly payments are greater. This can put a strain on any budget.

 

The Right Length for You

 

Most experts advise against buying a car based on the monthly payment, and instead setting a budget and working within it to get the most car you can realistically afford. Using this advice can help you keep payments reasonable and the loan term shorter. Of course, everyone’s circumstances are different and sometimes it is worth the trade-off of  a longer loan term for the reliability of a better car.