Loan Terms: How Long Should I Finance (or Refinance) a Car?

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It’s not just about the rates — how long it takes to pay back your car loan matters too.

With the car prices on the rise, it’s no surprise Americans are turning to their banks and credit unions for help.

In the first quarter of 2020, the average loan amount for a new vehicle was almost $34,000 and $21,000 for a used one. During that same period, 85% of new vehicles and 39% of used vehicles were financed, according to a Experian report.

While many of us focus on getting the lowest interest rate or lowest monthly payment, equally important is choosing the right loan term for our car loans and refinance loans. After all, your loan term (along with your interest rate) impacts how much you’ll pay over the life of the loan.

Let’s break down car loan terms and how to pick the one that best fits your financial situation.

2023 Auto Refinance Rates See Today's Rates

Auto Loan Term Lengths Explained

A loan term is an agreed-upon amount of time in which a borrower makes monthly payments toward a loan. This helps spread the cost of the item financed (like a vehicle or a home) over a period of time, instead of paying in full at the time of purchase.

Car loan terms are in 12-month increments. The term lengths you’ll come across most often for vehicle financing are 24, 36, 48, 60, 72, and 84 months. The most common auto loan term is currently 72 months, followed by 84.

In recent years, borrowers have been choosing longer term lengths. A 2017 Consumer Financial Protection Bureau (CFPB) report found that longer loan terms (six or more years, or 72-plus months) increased between 2009 and 2017 — accounting for 42% of all loan originations in 2017.

Shorter vs. Longer Car Loans: Why Does Term Length Matter? 

Before going into the why of it all, let’s define what exactly makes an auto loan term short or long.

Short-Term Auto Loans Long-Term Auto Loans
  • Term length under 60 months
  • Lower interest rate
  • Less interest paid over life of the loan
  • Higher monthly payments
  • Get positive equity as car is paid off faster
  • Lower chance of default
  • Term length 60+ months
  • Higher interest rate
  • More interest paid over life of the loan
  • Lower monthly payments
  • Risk negative equity if payments are spread too long
  • Higher chance for default

Short-term auto loans

As the name suggests, these car loan terms aren’t very long: 24, 36, and 48 months. If your goal is to save money over the life of the car loan, a short-term loan is the way to go.

Auto loans amortized, meaning your installments (monthly payments) are paid according to a schedule (loan term), and applied to your loan principal and interest per the agreement. This means that if you have a shorter loan term, not only will you pay off your loan faster, but you’ll pay less in interest too. (We’ll go over some examples below.)

As you pay off your auto loan principal, you’ll also earn positive equity. This happens when the amount you owe on your loan is less than your car’s value. In other words, your car is worth more than the loan amount itself. This is a great thing. You can use this to buy a new car or just rest easy knowing you won’t be stuck with a remaining loan balance should your financed car be totaled.

If your goal is to save money over the life of the car loan, a short-term loan is the way to go.

But not everyone’s main concern is paying less for their purchase overall. Others prefer month-to-month savings instead.

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Longer-term auto loans

A longer car loan term typically means 60, 72, 84 — even 96 months (that’s eight years!).

Borrowers often opt for these in order to save money monthly and pay the lowest payment possible. More expensive vehicles often have longer loan terms for this reason.

However, this approach has its risks too.

Negative equity occurs when you owe more on your loan than the vehicle is worth (aka upside down on your car loan). If you pay little-to-no down payment to buy a car that depreciates quickly and pick a long auto loan term, that’s the perfect recipe for negative equity as you drive off the car lot. And if you have a high interest rate too? Even worse.

In this situation, it’s wise to consider purchasing a GAP waiver or GAP insurance. If your vehicle is ever totaled, your car insurance company will only cover the value of your vehicle, not your auto loan balance. GAP, or Guaranteed Asset Protection, covers the difference so you’re not on the hook for the remaining balance.

Car loans with longer terms also have a higher chance of default, or not paying back the loan as agreed. According to the CFPB, 72-month loans are twice as likely as 60-month loans to result in a default.

Are longer-term auto loans bad?

Not necessarily. There are lots of reasons people choose a longer term length.

  • Some people like the option of having a smaller monthly payment but choose to make larger payments toward principal to pay down their debt faster.
  • Others choose to have a lower car payment and prioritize other bills and debt instead.
  • And some plan to drive their cars to the ground and aren’t as concerned about the pacing of their auto loan payoff.

And the list goes on.

People make personal finance decisions based on a variety of personal factors. Arm yourself with all of the right information — for example, how to calculate your loan-to-value ratio to see if you have negative equity — and do what’s best for you.

Car (LTV) Loan-to-Value Calculator

How much is your current car loan balance?
What's your car's current value?

Does credit score matter when choosing a car loan term length?

CFPB found that borrowers who took out longer auto loans (72 months or longer) had lower credit scores than borrowers who opted for 60-month loans. The average credit score for borrowers with 72-month auto loans was 674 compared 713 for borrowers with 60-month loans.

Keep in mind that your credit score is just one part of your auto loan or refinance loan application. There are other factors — like debt-to-income-ratio, loan-to-value ratio, etc. — that affect what kind of loan offer you’ll get.

How to Choose a Car Loan Term

Auto and refinance loans aren’t one-size-fits-all because the reasons behind buying (and financing) a vehicle vary from person to person. So how do you know what’s right for your own situation?

You can start by asking yourself the following four questions.

1. What kind of vehicle am I buying?

Some makes and models are known for holding their value longer than others. If your vehicle loses its value quickly, and you have a longer loan term, you’ll find yourself upside down on your loan.

Toyota vehicles are well-known for their reliability and frequently appear on lists of vehicles that hold their value. Trucks tend to have a higher resale value, but luxury vehicles depreciate the fastest — the Maserati Quattroporte loses 72% of its value over five years! And if you want an SUV that depreciates slowly, you may want to consider a Jeep, Toyota, Honda, Subaru, or Mercedes.

You can find car values and reliability information on sites like Edmunds, Kelley Blue Book, and NADA. You can also look at lists published by J.D. Power and Consumer Reports.

2. How long do I plan to keep this car?

Do you drive your cars until the wheels fall off, or are you addicted to that new car smell?

The average lifespan of a vehicle is over 11 years. With proper care and maintenance, cars these days are built to last 200,000 miles or more — which can take about 15 years for the average driver.

However, just because cars are lasting longer doesn’t mean people are holding onto them that long. A 2019 study found that average length of car ownership is 8.4 years.

If you’re getting rid of your next car sooner rather than later, it may make sense to get a shorter loan term. That way, you can use your positive equity to buy your next vehicle (instead of rolling over a loan balance into the new loan).

3. How much do I want to pay over the loan term?

Would you rather pay more every month in order to pay less money over the life of the auto loan? Or, would you rather have a lower monthly payment now, knowing that you’ll pay more money on the loan?

Let’s look at an example. To keep it simple, let’s assume you’re taking out an auto loan for $25,000 with an interest rate of 5%.

Car Loan Term Length Comparison on $25,000 Auto Loan
Loan Term Interest Rate  Monthly Payment  Interest Paid  Total Cost of Car Loan
36 Months 5% $749.27 $1,973.81 $26,973.81
48 Months 5% $575.73 $2,635.15 $27,635.15
60 Months 5% $471.78 $3,306.85 $28,306.85
72 Months 5% $402.62 $3,988.88 $28,988.88
84 Months 5% $353.35 $4,681.21 $29,681.21
As you can see in the chart above, a lower monthly payment comes at a cost, literally. The total amount you’ll pay on interest alone can be substantial.

If you’re choosing between a 60-month car loan or 84-month, you’ll save an extra $118.43 every month with a longer term. But you’ll also pay an extra $1,374.36 in interest — all while letting depreciation take its toll on your car’s value an additional two years.

But again, what’s your goal?

This may or may not matter if plan to keep your car for a long time. But if you plan to sell it or trade it in later, a longer term can make it harder to accomplish that.

4. How’s my credit?

You know the deal: good credit = better interest rates. This also includes better loan terms overall.

If you have a great credit, you can take advantage of the lower interest rates that come with shorter loan terms. Just be sure to shop rates with lenders to find the most competitive offer.

But what if you have bad credit? Sometimes you’re in a tough spot and get a higher-interest or subprime auto loan. These rates can range from 14% to over 20% — I’ve personally seen rates as high as 27%. Yikes.

Fortunately, just like you can refinance a mortgage, you can refinance an auto loan too. If you’ve improved your credit since taking out your loan, it’s worth looking into what kind of rates you may qualify for now and calculating potential savings.

However, keep in mind that there’s no guarantee that you’ll qualify for refinancing later after signing your auto loan contract. There’s more to an approval than just your credit score, so understand what you’re agreeing to pay when you sign on the dotted line.

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How Soon After Buying a Car Can I Refinance My Auto Loan?

In some cases, you can refinance your auto loan right after signing the contract.

Keep in mind that you’ll still have that credit inquiry and new loan on your credit report. These can lower your score temporarily. Waiting a few months to establish an on-time payment history, as well as taking steps to improve or boost your credit, can help you qualify for a competitive refinance loan.

But how soon are borrowers actually applying to refinance their auto loans? We looked at 2019 RateGenius data to find out.

  • On average, borrowers were just 38% into their term when they applied for auto loan refinancing, and the average remaining term length was 47 months.
  • For those who successfully refinanced their auto loans, borrowers were 22.8% into their term, with 55 months left on their original loans.

People are looking at their auto loans months or years later and wonder if they can get a better one. (Spoiler alert: You often can.) There are many reasons for this: credit scores rise, interest rates drop, life changes occur, resolutions to save money, you get it.

Should I extend my loan term when refinancing my car loan?

When evaluating refinance offers, don’t forget to compare loan terms in addition to interest rates. If you can, try to get a lower rate and keep the same loan term. That way you save both monthly and over the life of the new (better) loan.

Depending on your car’s age and how far you are into your current auto loan, your lender may or may not give you the option to lengthen your loan term. However, if you do decide to get a longer term, paying extra toward principal every month can keep you from going too far upside down on your loan.

Do the math to see how much you’ll be saving with each option provided. (Try this Auto Refinance Calculator to calculate your savings.)

So… How Long Should My Car Loan Term Be After All?

Plenty of personal finance experts will tell you why you should choose x, y, z loan terms, or none of the above. But in the end, you’re the one responsible for paying the auto loan and taking care of the vehicle.

As long as you do the work and understand what you’re signing, you should feel comfortable with your choice. And if you don’t, refinancing may be a good way to remedy that.

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