You may need to take out a loan to pay for your new car. The length of a car loan varies according to the needs of the borrower. Drivers often utilize a car loan to finance a vehicle, either new or old. However, before taking out a loan, you must determine how much you need to borrow and how long you want it to last.
The length of your car loan will affect interest rates, monthly payments, and other considerations. Auto loans do not have a set “average” period, but you can pay them off over 24 to 84 months. Your particular situation will show the best loan term for you. This is something to think about when deciding how long your loan will be.
What is the Average Length of a Car Loan
The length of a car loan typically lasts six years or 72 months. However, auto loans can range in duration from 12 months to 96 months. The majority of lenders provide a variety of auto loan terms in 12-month intervals. Although monthly payments for a shorter-term loan are higher, interest is paid by the borrower throughout the loan. Longer-term loans charge higher interest rates but have smaller monthly payments. The appropriate loan term is determined by the borrower’s financial situation.
Longer vs. Shorter Car Loan
Before obtaining a vehicle loan, applicants ought to be aware of all the expenses. A 36-month loan will end up costing more over time than an 84-month loan for the same amount, even though the latter has smaller monthly payments.
Let’s say a borrower gets a $35,000 car loan with a $7,000 down payment and an 11% interest rate.
- The borrower will pay $12,271.97 over seven years, or $479.43 a month, over 84 months. The entire amount borrowed is $40,271.97.
- The monthly payment for the borrower will be $916.68 over 36 months, but only $5,000.63 in interest will be paid. The entire cost of the loan is $33,000.63.
- Borrowers save $7,271.34 by taking out a shorter loan term.
If you’re unsure which term is best for you, consider how the loan will impact your spending plan. If your payback period is longer, you will pay less each month. But there is a price for this advantage. You will pay more interest during the loan duration than choosing a shorter period.
How Loan Term Affects Your Car Payment
The monthly payment on a vehicle loan will decrease when the loan term is extended. There are fewer loan installments due to the longer loan disbursement period. Long-term and short-term auto loans have their benefits.
A more trustworthy car may be more affordable if you go for a longer-term auto loan with smaller payments. As long as you make the payments on schedule, it can also help you get approved for a car loan that will help you develop or restore credit.
There are additional benefits to preferring a shorter-term auto loan that permits you to make significant payments. Paying off a loan sooner can save interest charges and reduce monthly car payments, allowing you to qualify for a new loan.
Benefits and Drawbacks of Longer-Term Car Loans
Most auto lenders offer a range of options when it comes to loan conditions. Both long-term and short-term loans have advantages and disadvantages.
Benefits of Longer-Term Auto Loans
- smaller, maybe more reasonable monthly installments.
- Reducing a borrower’s credit score requires regular, on-time payments.
- With a longer-term loan, borrowers might be able to afford a more expensive car with smaller monthly payments than they otherwise could.
Drawbacks of Longer-Term Car Loans
- Longer-term vehicle loans are more expensive since they often feature higher interest rates and more time for interest to accrue.
- Longer-term loans may force borrowers to pay more than the automobile is worth since cars lose value over time.
Benefits and Drawbacks of Short-Term Car Loans
If borrowers can manage the monthly payments, shorter-term auto loans can be a better choice.
Benefits of Short-Term Car Loans
Due to their shorter terms typically lower interest rates and shorter accrual periods, shorter-term auto loans may be more affordable.
- Vehicles financed for shorter periods will have less time to lose value during the loan term.
- Recipients of loans pay off their debt more quickly.
Disadvantages of Short-Term Car Loans
- Customers should be able to afford shorter-term auto loans because they have higher monthly payments.
- The lender has the right to request a larger down payment if the loan is shorter.
An auto loan has a length term of 24 to 84 months. The terms of the agreement depend on your personal preferences and monthly budget. Short-term financing can save significant money, but it may not be the best option for financing your dream car. However, the short-term loss can be well worth it if you can find a similar model for less money.