How Long Should I Finance a Car?

How long to finance? It depends...

The length of your loan term, along with your interest rate, will dictate how much you will end up paying for the car you want. Because of this, it is vital that you look at total cost, and not choose a more expensive car simply because you might be able to spread your loan term across a longer period of time. Your monthly payments are actually less important than considering the total cost of your car and how long it will take you to pay it off. But, how long to finance a car will depend on your financial situation, the car you want, and a number of other factors.  

In years past, it was unheard of to have a car loan that lasted six years or longer. But today, it has become more and more common for people to choose loans that exceed five years. The reason for this increase is because people want monthly payments that they can afford on the car that they want. But oftentimes, at the end of a sale, with taxes, fees, add-ons, and interest rate calculated into the total price of the car… the amount that the buyer originally intended to spend is increased significantly.

So, in order to buy that same car, the car buyer may opt for a longer-term loan to reduce the monthly payments. But this is probably not to the buyer’s benefit. Though the monthly payments on a long car loan term may seem more manageable, perhaps would be better to choose a car that is more affordable, and a loan that can be paid off quicker.

Benefits of long-term loans

Frankly, there is only one, major “benefit” of choosing to finance a car loan with a length of six or seven years… and that is to be able to afford a car that may actually be out of your price range. The lower payment amount afforded by a longer loan term will allow you to borrow more and keep within the payment amount you can afford on a monthly basis.

Problems with long-term loans  

• A long-term loan will inevitably cost you more money… and potentially thousands of dollars more than if you were to choose a shorter-term loan. Though you may have smaller monthly payments, extending your loan out—and continuing to pay interest on it—will result in the total cost of your car to rise substantially.

• The risk of ending up underwater on your car loan is much higher the longer your car loan term is. “Underwater” means that you owe more money on your car loan than that vehicle is actually worth. Building equity into a vehicle is hard enough when you factor in depreciation… but extend your loan out years longer than you should, and you are likely to owe more on your car than it’s worth by the time you want to sell it. So, even after you sell your vehicle, you could still be paying off the loan on that car in the months or years to come.

• The likelihood that a car buyer will keep their vehicle for seven years or more is relatively low. This means that, if you choose a seven-year loan, and want to buy a different car by year five, you will be forced to roll your remaining balance on the car into your new loan. So, you would end up with an even higher loan, and potentially another too-long-loan-term to waste your money on.

• Consider the resale value on your vehicle. Assuming the car you want isn’t already 25 years old, your car will depreciate in value every year that you keep it. So, in almost all cases, a five-year-old vehicle will be more valuable than the same car that is seven years old. Each year that you keep your car, its resale value decreases. And, depending on the vehicle you choose, it could depreciate significantly more between year five and year seven. Plus, you could be racking up some serious mileage during those last couple of years. 

Take a look at the math…  

If you want to buy a car for $20,000, with an interest rate of 6%, and a loan term of 7 years… you will be paying (minus the title, taxes, and other fees… just for clarity’s sake) $4,542.37 in interest over those seven years. Your monthly payments will be $292.17, but the amount you will spend in interest is substantially more than if you had chosen a shorter loan term. 

Now, take that same $20,000 vehicle, with an interest rate of 6%, and a loan term of 4 years. Your monthly payments will be $469.70, and you will only have paid $2,545.63 in interest. 

So… if you find a higher monthly payment is out of the budget, instead of choosing a longer loan term loan, consider choosing a less expensive vehicle.

How long should my car loan be?  

Though there is no definite answer to how long your car loan should be, you may want to consider a vehicle that you can afford paying off in less than five years. The savings in interest, the better resale value, and lower likelihood of ending up underwater on your loan make it all worth it.

Who should I work with to obtaining fair financing and a car?  

The amount of lenders and dealers that could potentially help you get a car is substantial… and probably overwhelming. Where do you start? Who will offer the best deal? This is where Car.com could help. We work with lenders and dealers all across the nation, and try to bring them to you. Car.com is a consumer connection service that is here to help you get the car you want. Our service is free and there is no cost or obligation on your behalf to work with any lender and/or dealer we connect you with.