When you get a car loan, picking the right loan term is key. Loan terms for cars usually last from 24 to 84 months. The most common lengths are 36, 48, 60, and 72 months.
Experian found that in early 2024, new cars had an average loan term of 67.62 months. Used cars averaged 67.37 months.
The loan term affects your monthly payment and the total interest you pay. Shorter terms mean lower total interest but higher monthly payments. Longer terms mean lower monthly payments but more interest paid overall.
It’s important to know about car loan terms before buying a car. This helps with your budgeting.
Key Takeaways
- Common car loan terms range from 24 to 84 months, with 36, 48, 60, and 72 months being the most popular options.
- Longer loan terms lead to lower monthly payments but higher total interest costs over the life of the loan.
- Shorter loan terms result in higher monthly payments but lower total interest expenses.
- The average auto loan term in the first quarter of 2024 was 67.62 months for new cars and 67.37 months for used cars.
- Carefully considering the car loan term is crucial when budgeting for a vehicle purchase.
Understanding Car Loan Terms
Financing a car means looking at the loan length, or the term. This is key to consider. Car loans can last from 24 months (2 years) to 84 months (7 years). The most popular choices are 36 months (3 years), 48 months (4 years), 60 months (5 years), and 72 months (6 years).
Also Read: How Does Your Loan Amount Affect Car Loan Requirements?
The loan term affects your monthly payments and the total interest over the loan’s life. Longer terms like 72 or 84 months mean lower monthly payments but higher total interest. Shorter terms, like 24 or 36 months, have higher payments but lower total interest.
Loan Term or Duration
Choosing a car loan term means balancing what you can afford with the interest you want to pay. Here’s a look at common car loan terms and their effects:
- 24 months (2 years): Higher monthly payments, but the lowest total interest cost.
- 36 months (3 years): Moderately higher monthly payments, with a lower total interest cost compared to longer terms.
- 48 months (4 years): More manageable monthly payments, with a moderate total interest cost.
- 60 months (5 years): Lower monthly payments, but a higher total interest cost over the life of the loan.
- 72 months (6 years): The lowest monthly payments, but the highest total interest cost.
- 84 months (7 years): The lowest monthly payments, but the highest total interest cost over the life of the loan.
Your financial situation, the car you’re buying, and your preference for monthly costs versus total interest will guide your choice. The right loan term balances these factors.
Also Read: What Are The Benefits Of A Car Loan For Students?
Principal, Interest Rate, and Monthly Payment
Understanding the relationship between the car loan principal, interest rate, and monthly payment is key. Most car loans use simple interest. This means your monthly payment stays the same, but how much goes to the principal balance and interest changes.
The loan term’s length affects the total interest you’ll pay. Longer terms mean slower principal reduction and more interest accrual. Shorter terms cut down the principal balance faster, reducing total interest.
The interest amount you pay each month depends on your principal balance. Longer loans with lower payments mean slower principal reduction and more interest over time. This increases the total interest paid compared to shorter loans.
Also Read: How Can You Improve Your Car Loan Approval?
| Loan Term | Principal | Interest Rate | Monthly Payment | Total Interest Paid |
|---|---|---|---|---|
| 36 months | $20,000 | 5% | $585 | $1,060 |
| 60 months | $20,000 | 5% | $377 | $2,620 |
The table shows a 60-month loan has a lower monthly payment but more total interest than a 36-month loan.
“The key to minimizing the total interest paid on a car loan is to choose the shortest term you can afford with the highest monthly payment you’re comfortable with.”
car loan terms
When looking at car loans, the annual percentage rate (APR) is key. It shows the real cost of borrowing, including the interest rate and fees. Knowing the APR helps you make a smart choice and compare loan offers better.
Also Read: How Does A Home Loans Work?
The Truth in Lending Act (TILA) makes lenders show the APR. A higher APR means you’ll pay more in total interest over time. So, it’s important to look at APRs to find the best car loan deal.
“The APR allows you to more accurately compare the cost of different auto loan offers, as lenders are required by the Truth in Lending Act to disclose the APR.”
Let’s look at an example: two car loans, both for $20,000 and 60 months. Loan A has a 5% interest rate and an APR of 6%. Loan B has a 6% interest rate and an APR of 7%. Over 60 months, Loan A costs $2,225 in total interest, and Loan B costs $2,654, a difference of $429.
Understanding the annual percentage rate (APR) in car loans helps you make a better choice. It leads to the best financing terms for your car.
Also Read: What Factors Affect Your Home Loan Approval?
Down Payment and Loan-to-Value Ratio
When you’re looking to get an auto loan, the down payment and loan-to-value (LTV) ratio are key. The down payment is the money you put down at the start. The LTV ratio is the loan amount divided by the car’s value.
Putting down a big amount can change your auto loan for the better. A big down payment means you borrow less. This lowers your LTV ratio. A lower LTV ratio means you’re less likely to have negative equity, where you owe more on the car than it’s worth.
Having negative equity can be a problem if you sell or trade-in your car early. You’d have to pay the difference between the loan balance and the car’s trade-in value. Making a big down payment helps keep your LTV ratio low. This way, you avoid negative equity and make your financial path smoother.
| Loan-to-Value Ratio (LTV) | Impact on Loan |
|---|---|
| High LTV (over 90%) | Increased risk of negative equity and higher monthly payments |
| Low LTV (under 80%) | Lower monthly payments and reduced risk of being upside down on the loan |
Understanding the role of down payments and LTV ratios helps you make smart choices. These choices can improve your financial health over time.
Also Read :ย How Does Your Loan Amount Affect Car Loan Requirements?
Conclusion
Learning about car loan terms like loan duration, monthly payment, and interest cost is key when buying a car. It’s important to pick a loan term that fits your budget and keeps interest costs low. Things like the annual percentage rate (APR), loan-to-value ratio, and your credit score affect what you can get.
Knowing about car loans helps you make a choice that suits your finances and gets you a good deal on your car. Think about these car loan terms to find a loan that matches your budget and goals. This way, you’ll be ready for your car purchase.
Getting to know car loan terms is vital for a wise financial choice when buying a new car. With the right info and strategy, you can get a loan that meets your needs. This way, you can confidently drive away in your new car.
FAQs
Q : What are the common car loan terms?
Common car loan terms include 24, 36, 48, 60, 72, and 84 months. Some lenders offer 12-month and 96-month loans too. Longer loan terms mean lower monthly payments but higher total interest over time.
Q : How does the loan term affect the monthly payment and total interest cost?
Longer loan terms mean lower monthly payments. But, you’ll pay more in total interest. This is because you’re paying down the principal slowly and accruing interest over a longer time. This makes the total interest paid higher than with shorter-term loans.
Q : What is the Annual Percentage Rate (APR) and how does it affect the cost of the loan?
The APR is the yearly cost of borrowing money, including fees, shown as a percentage. It includes both the interest rate and any fees. A higher APR means you’ll pay more in total interest over the loan’s life.
Q : How does the size of the down payment and the loan-to-value (LTV) ratio impact the car loan?
A bigger down payment lowers the loan amount and the LTV ratio. The LTV ratio is the loan amount divided by the car’s value. A lower LTV ratio reduces the risk of owing more on the car than it’s worth. Making a big down payment helps avoid this problem.
