Currently, the average auto loan term is 68.47 months for new cars and 64.36 months for used vehicles, according to Experian. Some borrowers are extending their loan terms well beyond that. Experian data shows that 30.0 percent of all new car loans and 18.1 percent of all used vehicle loans had a term of 73 to 84 months. Although the monthly payment is more affordable with a longer loan term, you should try to avoid an 84-month car loan, or anything that exceeds 60 months for that matter.
The Problem with Longer Auto Loans
A decade ago, 60 months was the accepted maximum term for an auto loan by both most lenders and buyers. That’s because a vehicle's value drops significantly after five years (in some cases by as much as 70 percent). This is also a point at which cars may begin to have mechanical issues which are no longer be covered by manufacturer warranties, which generally expire after three years.
These days, auto loan terms are increasing, which leads to a lot of problems:
- Resale value drops even more – Because you’re keeping the vehicle for longer, its resale value is going to drop significantly due to depreciation. Sure, depreciation levels out after three to five years, but you can’t stop additional depreciation from occurring.
- You end up paying more in interest – Your monthly payment may be lower, but you end up paying more in interest charges over the loan term.
- You run the risk of being upside down longer – One last drawback to a longer loan term is that your car is worth less than the loan balance for a longer period of time. This can be an issue if the vehicle gets totaled, stolen, or you want to sell it or trade it in.
How to Make a Shorter Car Loan Term More Affordable
If you don’t want to be tied to a loan for 84 months or more, how do you make a shorter loan more affordable? The key to this is a down payment. Putting money down reduces the amount you need to finance, which lowers the amount of interest charges you end up paying. Basically, the larger the down payment, the more affordable the loan is in the long run. Not to mention, a large down payment can help you shorten your loan term while still netting a monthly payment fits your budget.
For example, let's say you finance a $12,000 vehicle with a nine percent interest rate. Here's what an 84-month auto loan looks like compared to one with a 60-month term:
| Monthly Payment | Interest Paid | Total Cost | |||
| 84-Month Term | $193.07 | $4,217.78 | $16,217.78 | ||
| 60-Month Term | $249.10 | $2,945.97 | $14,945.97 |
As you can see, shortening the loan term by two years saves you nearly $1,300 in the long run. However, let's say the 60-month loan's $249.10 monthly payment is too high for your budget. This is where having a down payment can help you out. Using the same $12,000 loan with a nine percent interest rate, here's how different down payment amounts make a 60-month loan more affordable:
| Down Payment | Loan Amount | Monthly Payment | Interest Paid | Total Cost |
| $0 | $12,000 | $249.10 | $2,945.97 | $14,945.97 |
| $1,200 (10 percent) | $10,800 | $224.19 | $2,651.42 | $13,451.42 |
| $2,400 (20 percent) | $9,600 | $199.28 | $2,356.85 | $11,956.85 |
This is why a down payment works in your favor. You not only lower each and every monthly payment you have to make, you also save money on interest charges.
Finding the Loan You Can Afford
You don’t need to have a longer loan term to make financing a vehicle affordable. As long as you save for a down payment, you can take out a loan with a payment that fits your budget that's much shorter than 84 months. Remember, a down payment can be made in cash, trade-in equity, or a combination of both.
If you're looking for help in your search for a car loan, Auto Credit Express works with dealers all across the country that specialize in assisting borrowers dealing with unique credit situations. Once you complete our simple and fast auto loan request form, we'll work to match you with a dealership near you. Get started right now!
