When you're financing a vehicle, it’s wise to choose a car loan term that you can comfortably repay each month but also one that doesn’t last for too long. It’s a balance between how much you want to pay in interest charges and how large of a car payment you can handle. Car buyers with tarnished credit should be thinking of a maximum loan term of between 48 and 60 months.

Available Car Loan Terms

Car loans are typically referred to in months instead of years. The standard car loan financing terms are usually 36 to 84 months, but this varies by automaker and lender. Typically, borrowers are recommended to choose a loan term that’s 60 months or less – especially if you’re set to have a higher-than-average interest rate, which is common for borrowers with bad credit.

The key to choosing a loan term is understanding how much you’re going to pay over time and your position as a borrower. If you have poor credit, you’re likely to pay more when you finance due to a higher interest rate. Keep your interest charges in mind while choosing a loan term because they can add up quickly.

For example: Let’s say you want to finance a used vehicle for $20,000 with a 13% interest rate (the average interest rate for bad credit borrowers in our dealer network).

What Is the Longest Auto Loan Term to Aim For?

Using this information, here are the estimated interest charges you pay depending on your loan term:

  • 36 months: $4,260
  • 48 months: $5,754
  • 60 months: $7,304
  • 72 months: $8,907
  • 84 months: $10,562

You may be wondering, “What about the monthly payment?” and that’s a solid concern. Estimated monthly payments by loan term using the above example are:

  • 36 months: $673.88
  • 48 months: $536.55
  • 60 months: $455.06
  • 72 months: $401.48
  • 84 months: $363.84

You may now see how choosing a loan term is a balancing act between month-to-month affordability and long-term cost. Choosing an 84-month loan term, which is typically the longest car loan term available, certainly gets you lower monthly payments, but it also means paying well over $10,000 in interest charges and ending up paying over $30,000 for a $20,000 vehicle.

Navigating Auto Loan Interest: Smart Choices

Most borrowers don’t get to borrow money from an auto lender for free. Lenders charge interest, and borrowers with the lowest credit scores are typically charged more.

If you have great credit, for example, you may qualify for a 0% interest rate for 84 months – which means choosing the longest loan term available can benefit you greatly. A low monthly payment and no interest? Great deal!

However, borrowers with credit scores below 700 aren’t likely to qualify for incentives like this, and it’s a good idea to plan and account for interest charges. You never really know what your interest rate is going to be until you apply for a car loan, but with a poor credit score, you may have to plan for an interest rate in the double digits.

A good way to lower your interest charges is by choosing an inexpensive vehicle, putting money down, and choosing a shorter loan term. Having a large down payment can also increase your chances of qualifying for a car loan if your credit score is less than stellar. It shows you’ve some skin in the game and lowers the amount you need to finance.

According to Experian Automotive, the average interest rate on a new car loan during the first quarter of 2023 was 6.58%. Even with interest rates that reasonable, "To keep that payment low (buyers) spread that payment out over a longer period" according to Melinda Zabritski, senior director of automotive credit at Experian Automotive.

But there is a catch: the borrowers she's referring to have good to excellent credit. According to Zabritski, the difference in interest charges between a 60-month and 72-month loan for these buyers is minimal: "You might only pay $500 or $600 more over the entire life of that loan, but you'll save $50 or $75 a month. So the breakeven point comes pretty darn quick."

Car Loan Terms: Understanding Your Options

But how does stretching a car loan affect buyers whose credit scores fall in the near-prime to subprime range?

Stretching A Loan Term With Bad Credit

For credit-challenged car buyers, stretching that loan term is more expensive in at least a couple of ways, even if the new car being financed is far lower than the average transaction price of $40,851 recorded in Q1 2023.

  1. Consider this: a new car with a selling price of $28,000, a down payment of $1,000, an amount to finance of $27,000 with an interest rate of 14.99 percent, and financing for 48 months, would have a monthly payment of $751.29 and interest charges of $9,06262. Using this example, each year that loan is extended results in roughly an additional $2,469 in interest expenses. Thus, a 60-month term has a payment of $642.19 and interest charges of $11,531, while a 72-month payment will be $570.77 with interest expenses of $14,095 (more than half the selling price of the vehicle).
  2. The longer the vehicle is financed, the longer it will be worth less than the loan payoff amount. For credit-challenged borrowers, this means that after a couple of years and even if they've reestablished their credit, they will be unable to re-finance their vehicle rate or finance another vehicle at a lower interest rate because they owe more on their current vehicle than its book value. In other words, unless they can come up with the cash, they could be stuck with their current high interest rate for one, two, or even three more years.

Simply put, borrowers with poor credit could very well end up paying two to three times as much in additional interest charges for extending their loan term as compared to people with good credit.

Our advice to consumers with credit issues: until you've returned your credit to good standing, choose the shortest loan term possible.

Start Car Shopping Today

Here at Auto Credit Express, we know that sometimes the hardest part of getting an auto loan is finding the right lender. Not all auto lenders can assist borrowers with less-than-perfect credit, but we’ve got connections.

Complete our free auto loan request form and we’ll look for a special finance dealership in your local area. Dealers in our network are signed up with bad credit auto lenders that know that borrowers are more than a credit score – so get started today!