Key takeaways

  • A longer loan term means you'll get a lower monthly payment, but you'll also pay more in interest.
  • A shorter loan term is better, as it helps minimize borrowing costs and the risk of being upside-down on your loan.
  • Consider the monthly payment and overall cost of ownership when determining which auto loan term is best for you.

Shopping for a new car is exciting. If you’re planning to finance the purchase, you’ll need to find the perfect loan and iron out the details before heading to the dealership. When exploring auto loan options, give some thought to the loan term you select. Most lenders offer terms between 24 and 84 months, but some lenders offer terms up to 96 months.

The average loan terms for new and used car purchases are 68.26 and 67.57 months, respectively, according to the most recent State of the Automotive Finance Market report from Experian.

If you aren’t sure which term is best for you, consider how the loan will impact your finances. A longer repayment period gives you a lower monthly payment, but this benefit comes at a cost. You’ll pay more in interest over the loan term than you would if you choose a shorter term.

How long should you finance a car for?

It depends on how much of a monthly loan payment you can afford. A lengthy term makes the monthly loan payment more affordable but at the expense of steeper borrowing costs.

Here’s a step-by-step breakdown to help you find the loan term that works best for you.

  1. Determine your budget. This should be your monthly budget and how much you want to pay for the car itself. Financial experts recommend spending no more than 20 percent of your take-home pay on an auto loan payment. Also, consider whether your financial situation is likely to change and factor that in.
  2. Get prequalified. Shop around and get prequalified with at least three lenders to find the most competitive rate. If you have an account with a local bank or credit union, start there. You could qualify for attractive terms off the strength of your existing relationship with the lender.
  3. Analyze borrowing costs. Take your prequalification results and plug them into an auto loan calculator to view your estimated loan payment. You can also view the amortization table to see how much you will pay per month along with your total interest costs with each loan term.
  4. Make a decision. Consider both the monthly payment and the overall cost when deciding which loan term best suits your needs. Once you pick the right fit, apply with the lender to get preapproved for financing. A car loan preapproval is a formal commitment from a lender to loan you funds. It also helps you negotiate more effectively with the dealer.

Below is a table demonstrating how the term you select can impact your monthly payment and interest costs over the life of the loan. The figures are based on a $40,000 loan with a 6.5 percent interest rate.

Term Monthly payment Total interest paid
36 months $1,226 $4,135
48 months $949 $5,533
60 months $783 $6,959
72 months $672 $8,413
84 months $594 $9,894

Pros and cons of a long-term loan

If you’re leaning towards a long-term loan, here are some benefits and drawbacks to consider to make an informed decision.

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Pros

  • Lower monthly payment: If your budget is tight, a longer term could make your auto loan payment more manageable.
  • Increased affordability: You may be able to afford a higher-priced vehicle if you opt for a long-term loan.
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Cons

  • Higher borrowing costs: The lender has more time to collect from you, so you’ll pay more in interest.
  • Risk of being upside-down on your loan: You could find yourself owing more than your vehicle is worth, which is particularly problematic if you plan to sell or trade your vehicle in the near future.

Pros and cons of a shorter auto loan term

Short-term auto loans also come with key advantages that could make them a better choice. There are also disadvantages that should not be overlooked when deciding if they’re a smart financial move.

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Pros

  • Lower borrowing costs: A shorter loan term means lower interest costs over the loan term.
  • Ownership timeline. Paying the car off over a shorter timeframe also means you’ll own it outright much sooner, potentially avoid the negative impact of depreciation and free up room in your budget.
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Cons

  • Higher monthly payment: As previously stated, you can expect a steeper monthly payment that can limit you to lower-priced vehicles.
  • Potential budgetary constraints. If you don’t have much wiggle room in your budget, taking on a loan with a shorter term can be risky, especially if you don’t make a sizable down payment.

The bottom line

Before shopping for a new ride, it’s essential to determine how much you can truly afford and which loan term works best. Start by getting prequalified and running the numbers to determine if the monthly auto loan payment fits your etbudget. It’s equally important to factor in other expenses, including fuel, insurance and maintenance costs.

Although a shorter term can save you a bundle, it may not be the best fit to finance the car of your dreams. But if you can find a less expensive, comparable model, the compromise may be well worth it in the long run.

Regardless of which loan term you choose, be sure to compare auto loan rates before signing on the dotted line to get the best possible deal on financing.