Most people don’t have the funds on hand to pay for a car outright. Whether the car you want to buy is new or used, it’s likely that you’re going to need to finance all or some of the cost. One of the decisions you’ll need to make when financing a new vehicle is the loan term, or the period of time over which you’ll be repaying the loan - typically anywhere from 12 to 84 months. Depending on the cost of the vehicle you're financing, there are a number of loan terms to choose from.
For years, most auto loan terms have been in the 36- to 48-month range. Lately, however, terms of more than 48 months have become more common. Originally, auto loans were capped at 12 months, but this period has increased throughout the years auto lending has expanded.1 As of the end of 2013, the average loan period for a used car had extended to 60 months, with indications that the period will continue to grow.2
A longer loan term can make a big difference when it comes to your monthly payment. For instance: let’s imagine the amount you’re financing is $25,000. You’ve been approved for 3% APR, and you’re deciding between a 36-month loan term and a 72-month loan term. The shorter loan period allows you to pay off the car more quickly but makes your monthly payments higher, while the longer loan period lowers the monthly payment but extends the length of time needed to pay off the vehicle. Specifically, with the 36-month loan the payment will be around $727/month, while the payment on the 72-month auto loan will be only $379/month.
Is a 72-month auto loan right for me?
While the contrast between those figures is stark, you have to consider what payment fits your budget and how fast you care about paying your car off. Here are some things to keep in mind about 72-month and long-term loans in general:
- Lower monthly payments: Extending your loan period drives your monthly payment down, sometimes by half or even more when compared to briefer loan periods.
- Loan requirements: Like with any loan application for a large purchase, the lender will evaluate your credit-worthiness before approving the loan. Because the monthly payment is reduced as the loan term is extended, in some cases it may be easier to qualify for a longer term loan because the payment represents a smaller proportion of your monthly income.
- Financing costs: While it would be great if you could have the lowest possible monthly payment and the lowest possible financing costs, that’s unfortunately not how it works. Although a low monthly payment can be enticing, especially when considered side-by-side with the monthly payment associated with a short-term loan, realize that the cost of borrowing will be greater over the life of the loan.
Long-term auto loans can be helpful from a budgeting standpoint, but the best financial decision when deciding on the length of your loan will usually be to choose the term that allows you to pay the loan off as quickly as you’re able.