Choosing the Right Car Loan Term: Balancing Monthly Payments and Total Costs

When you buy a car using a loan, one of the decisions you'll need to make is how long you want to take to pay back the loan. 

This period is called the term of the loan. The length of the loan can affect your monthly payment and the total interest you will pay over time.
 

Here are the most common loan lengths:

• 24 months
• 36 months
• 48 months
• 60 months
• 72 months
• 84 months

However, some lenders might also offer other options like 12-month and 96-month loans.
 

Average Car Loan Length

According to data from Experian for the third quarter of 2024:
 

• The average new car loan term was about 68 months.
• The average used car loan term was about 67 months.

Factors to Consider When Choosing a Loan Term

When picking a loan term, it's important to balance your monthly budget with the total cost of the loan.

Choosing a longer loan term reduces your monthly payment, but you'll end up paying more in total interest.

Check out: The True Costs of Owning a Car: Budgeting Tips and Crucial Expenses to Keep in Mind

For example, let's look at a $35,000 car loan at 9% APR with no down payment:

• A 24-month loan would have a monthly payment of about $1,599 and total interest of $3,375.
• A 48-month loan would have a monthly payment of about $871 and total interest of $6,807.
• A 72-month loan would have a monthly payment of about $631 and total interest of $10,424.

Benefits of Different Loan Terms

• Short-term Loans: 
  • Higher monthly payments, but lower overall interest costs.
  • Quicker payoff means less time under debt.

• Long-term Loans:
  • Lower monthly payments, which might allow you to afford a nicer car.
  • Easier to manage monthly budgets, but higher overall interest costs.

Negative Equity and Loan Length

The longer your loan term, the more likely you might end up owing more on the loan than your car is worth—this is called negative equity.

If you want to sell or trade in your car, you'll need to pay off the difference, which can be a hassle.
 

Conclusion

Choosing the right car loan term is a balance between managing your monthly budgets and minimizing total costs. Be sure to consider both aspects before making a decision.

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