Purchasing a car is one of the most significant financial decisions many people make in their lifetime. Alongside choosing the right model, features, and dealership, determining the best way to finance your vehicle is critical. A key part of this decision is understanding how long car payments last and how different loan terms can affect your overall financial health.
In this blog, we will explore the different car payment durations, what factors to consider when selecting your loan term, and how to choose a payment schedule that works for your budget.
What Are Car Payments?
When you finance a car through a loan, you’re agreeing to make monthly payments for a predetermined period of time, covering both the principal amount (the actual cost of the car) and the interest charged by the lender. These payments allow you to spread out the expense of buying a car over several months or years, making it more affordable in the short term.
Key Takeaway:
Your monthly car payment is influenced by three major factors:
- The loan amount (or principal)
- The interest rate
- The length of the loan term
Typical Car Loan Terms
Most car loans have terms that range from 24 months to 84 months (2 to 7 years). The term you choose will depend on your financial situation, the car’s price, and your monthly budget. Here’s a breakdown of common car loan durations:
- 24-36 Months (2-3 Years): Short-term loans offer higher monthly payments but allow you to pay off your car quickly.
- 48-60 Months (4-5 Years): The most popular option for many buyers, balancing affordability and reasonable loan length.
- 72-84 Months (6-7 Years): Long-term loans offer lower monthly payments, but you’ll pay more in interest over the life of the loan.|
Key Statistics:
- According to the Federal Reserve, the average car loan term in 2023 was around 69.7 months.
- Loans with durations of 72 months or longer now make up over 40% of all new car loans in the U.S.
Factors That Affect Loan Term Selection
Choosing how long your car payments will last involves considering multiple factors. Here are some of the most important:
- Monthly Budget: Shorter loans have higher payments, while longer terms reduce the monthly amount. If your budget is tight, a longer term may feel more manageable.
- Total Cost of Ownership: Short-term loans save you money on interest but may strain your budget. Long-term loans, though easier on your monthly expenses, will lead to more interest being paid over time.
- Car Depreciation: The longer your loan term, the more likely you are to owe more on the car than it’s worth (referred to as being “underwater” or “upside down”). Depreciation is significant within the first few years of ownership.
- Credit Score: Your credit score can impact the interest rate you’re offered, which in turn can influence your decision on the loan term. High credit scores generally get lower interest rates, which could make shorter loans more appealing.
Pros and Cons of Short-Term vs. Long-Term Loans
When deciding on how long your car payments will last, it’s important to weigh the benefits and drawbacks of different loan lengths.
Short-Term Loans (24-36 months):
Pros:
- Pay off the vehicle quicker.
- Lower interest rates overall.
- Build equity in the car faster.
Cons:
- Higher monthly payments.
- Strain on your immediate budget.
Long-Term Loans (72-84 months):
Pros:
- Lower monthly payments.
- Can afford more expensive cars with smaller monthly obligations.
Cons:
- Higher total interest paid.
- More likely to become upside down on the loan.
- Takes longer to build equity.
How Loan Length Affects Interest Rates and Total Cost?
A major consideration when deciding how long your car payments should last is how the loan term will affect the total cost of the car. Longer loan terms usually come with higher interest rates, meaning that even though your monthly payments are lower, you end up paying much more in interest.
Example Scenario:
If you finance a $30,000 car:
- 36-month loan at 3% interest: Your monthly payment would be approximately $873, and you would pay around $1,400 in interest over the life of the loan.
- 72-month loan at 5% interest: Your monthly payment would be roughly $483, but you would pay $4,760 in interest over the loan’s term.
As you can see, the longer the term, the more expensive the loan becomes in the long run, even if the monthly payments are more manageable.
Prepayment and Early Loan Termination
If you’re worried about the overall cost of interest on a long-term loan, you can always opt for prepayment. Prepayment refers to paying off your loan ahead of schedule, either by making larger monthly payments or by paying a lump sum.
Before considering this option, check with your lender to see if there are any prepayment penalties. Some lenders charge fees for early loan termination, but others allow borrowers to pay off loans early without penalty, which could save you money on interest.
Tips to Choose the Right Car Loan Term
Here are some actionable tips to help you make the best decision for how long your car payments should last:
- Consider Your Monthly Budget: Always start with your monthly budget and determine how much you can comfortably afford without overextending yourself.
- Think About Your Long-Term Financial Goals: A longer loan term may mean lower monthly payments, but if you’re planning on other major expenses in the future, carrying debt for an extended period could complicate your financial picture.
- Evaluate the Interest Rate: Be sure to consider how much interest you’ll pay in total. Even a small increase in the interest rate can have a significant impact over 5-7 years.
- Factor in the Car’s Depreciation: Avoid getting a loan term so long that your car will be worth significantly less than the remaining loan balance midway through the term.
- Consider Prepayment Options: If possible, select a loan with no prepayment penalty, so you have the flexibility to pay off the loan faster.
Conclusion
The length of time your car payments last depends on a variety of factors, from your financial situation to the price of the car and the interest rate on your loan. While short-term loans allow you to pay off your vehicle faster and with less interest, they can strain your monthly budget. On the other hand, long-term loans provide lower monthly payments, but the total cost over the life of the loan will be higher.
Before committing to a loan term, it’s essential to carefully evaluate your financial health, credit score, and long-term goals. By doing so, you can find the car payment plan that best fits your lifestyle, ensuring you drive away happy and financially secure.
