Understanding the average car loan length can help you make an informed decision and save money in the long run. As you embark on the exciting new journey of purchasing your next vehicle, you’ll likely discover two things:
- Experts agree that the shorter a car loan is, the better, due largely to savings on interest.
- No two shoppers are the same, and neither are their loans.
According to Experian, in 2023, the average loan term for car shoppers looking for new or used vehicles was about 67 months.
As new and used vehicle prices show signs of dropping, you may wonder how this impacts you. If in the market, there are several important factors to consider when shopping rates.
Time is money when it comes to auto financing
The best loan terms are the ones that fit your personalized needs. When researching options, weigh the pros and cons of term length. The typical car loan length is 60 months—or five years—but it can be tailored based on your financial goals.
Be sure to review the loan terms, including the duration of the loan and the interest rate. The longer your loan term, the lower your monthly payments, but the higher the overall interest. Interest accrues over time, and long-term car loans typically have higher interest rates. You’ll pay more in interest over the life of the loan, and the longer you’re paying into the loan, the more finance charges you will accrue.
On the other hand, shorter terms mean higher monthly payments, but you’ll pay off your car sooner and owe less interest. For borrowers who don’t have a large monthly budget to put toward a car payment, longer terms might be the most affordable option.
When shopping, understand that vehicles typically depreciate over time. Consider the expected depreciation rate and how it may impact the value of your car compared to your outstanding loan balance.
Is the honeymoon over?
We love our vehicles when they’re brand-new. But as they age, the initial love often fades, and sometimes, we become anxious about trading them in. For example, say you take out a six-year loan on a three-year-old car. You will have a nine-year-old vehicle you may be eager to replace at the end of your loan term.
If the new vehicle bug bites before your loan term is up, this could lead to negative equity, meaning you could owe more than the vehicle is worth.
Treading water or rising above it?
A new car typically depreciates about 25% in its first year. At the beginning of a loan, the buyer is usually “upside-down” or “underwater.” Trading in your vehicle when you’re already “upside-down” means that the negative equity mentioned previously could be added to your new vehicle loan, increasing your payment.
As mentioned, the longer the loan term, the more you will likely pay in finance charges. The situation worsens if you can’t make a large enough down payment or if you’ve added negative equity from your previous vehicle loan into your current loan.
To trade or not to trade?
Resale value is something else to consider when signing up for an extra-long auto loan. In general, you’ll want to consider your vehicle’s worth at the end of the loan, so you know whether to trade it in, keep it or donate it.
You might consider getting pre-qualified with Drive®, by Santander®. Our Budget Customizer can help you find your desired vehicle on your chosen terms. Since it’s personalized for your situation, you can better decide which loan term is right for you. Your car, your terms; the choice is yours!
*Pre-qualification is subject to approval. Final credit terms are subject to change based on the submittal of a credit application at a participating dealer, which may impact your credit.
