A Buyer’s Guide to Car Loan Lengths

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A recent study found that in 2022 over 40% of used cars and over 85% of new cars were purchased using financing. Financial loans are crucial to help afford large purchases such as land, houses, and motor vehicles. However, with so many options available, what car loan length is right for you?

Don’t worry; with this guide, you can find out! We’ve investigated both short-term loans and long-term loans to help you determine which auto loan is the best for you.

Now, are you ready to get started? Here’s an in-depth look at your auto financing options:

What Is a Car Loan Term?

A car loan term describes how long you have to pay back the amount of money that you’ve borrowed. You can think of it as a repayment period, just with a different name. After all, you have so many months to send the money back to the lender, and if you don’t, there will be consequences.

For example, the lender will report your actions to your credit lender, which will increase the interest on your initial loan and tank your credit score. The loan contract itself may be in jeopardy, and depending on how long you haven’t paid your bills, the dealer may repo your car.

Therefore, understanding how much money you need to pay back your loan and for how long is crucial. However, it’s not only to keep your car but to keep yourself in good financial standing.

What Is the Normal Length of a Car Loan Term?

Most dealers have a few standard loan agreements that range from 12 months to 60 months. It’s hard to establish a normal length for a car loan since what is good for one is drastically different from what is good for another person.

With that said, most financial advisors agree that having a loan paid back within three years is favorable. Now, we recognize not everyone can afford a three-year loan, so a length that’s more representative for the general public is five years. Think of car loans this way; three years is where you want to be; however, if that is unattainable, pick a five-year loan.

Car Loan Terms Are Becoming Longer

Car loans are becoming longer and longer in 2010; the average length was around 62 months. Then in 2015, the average length shifted to about 67 months, and now in 2022, the average length has once again risen, this time up to 80 months. That is six and a half years!

Plus, that’s just on average; sometimes, people take out loans even longer. For example, loans for 84 to 94 months are also popular but less likely.

However, why are they popular? After all, wouldn’t a shorter loan be better since you would be able to pay off your loan more quickly? Not exactly, you see; a longer loan decreases the monthly repayment amount. Even if you have higher interest fees, the fact that it’s so spread out makes it a more affordable option that’s appealing to people with limited or restricted funds.

Another reason for longer car loans is that cars are getting more expensive. In fact, car prices have increased by as much as 40%.

To make that expense more affordable, lenders have created longer loan terms. Therefore, we are leaning away from the traditional three and five-year loan terms and are switching to six and eight loan plans.

Can You Change Your Loan During Your Contract?

While you can change your loan during your contract, the only way to do so is to refinance. Now, sometimes it is a tedious process that some people may not have the time to do so. So while the option is available, it’s not as easy as one may think.

First, you have to apply for refinancing, which in short terms asks why the contract you have now isn’t working for you and why you want to change it. You’ll have to prove that a new loan will be better for you by providing bank statements, pay stubs, and even tax records.

Once you turn in the application, the lender will look it over and decide whether you’re a good candidate for refinancing. If they accept you, they will work with you to rewrite a new contract that helps pay off your original loan while creating a new loan altogether. Once the refinance is signed and completed, you can make payments toward your new loan just like you did on your original.

Now, even though it can be a slow process, at times can save you money on interest or lower your monthly payment. If you need some breathing room in your budget, talk to a financial advisor about refinancing your car loan length. There’s no reason to be stuck in a loan when you can refinance.

The Benefits of Shorter Loans

Earlier on in this guide, we mentioned that financial experts recommended loans for up to five years, but why? Is it because they are easier to pay back or have less interest? Are short-term loans that much better to have?

You can have all your questions answered below:

They’re Less Risky

When you take a loan out, the lender agrees for you to access a certain number of funds on certain conditions. One of these conditions is that you have an acceptable financial standing to be able to repay the lender within the contract length. Of course, no matter how much evidence of your income, the lender can’t be 100% certain that you can or will repay your loan.

That’s why shorter loans are less risky. The less time you have to repay your loan, the less time your circumstances can change.

It also explains why short loan lengths generally have lower interest rates because shorter loan lengths are less risky for the lender and thus are cheaper. This brings us to our next benefit.

They’re Cheaper and Have Easy Resale Ability

Since shorter loans have much better interest rates, you’ll be able to get a loan that’s much cheaper, but keep in mind that you will have to pay more money per month. However, there are upsides to paying off your loan quickly.

After all, you’ll be able to sell your car faster and get a better return on your investment. For example, let’s say you take out a three-year loan, and you take relatively good care of your care. Well, then your car is only three years old and is in good condition. You can get more than half, if not more than what you originally paid for the car, just from the sale of it.

However, if you took out a six-year loan, at the three-year mark, rather than selling it, you would still be paying off your loan, and the interest would be slowly increasing. Then when you go to sell it at the six-year mark, it’s not nearly as profitable as it would be three years prior. It more than likely has dings or a few accidents under its belt and has been driven a lot of miles.

To put it simply, if you want a vehicle that will give you a good resale ability, go for a short loan length. However, if you don’t care about getting your return on your investment, stick with what you can afford and go for a longer loan.

The Benefits of Longer Loans

After all, longer loans are not all bad; they too have their benefits. The main benefit of longer loans is that they offer lower monthly payments, which makes them more affordable for those that have limited monthly funds.

For example, instead of paying $100 or more so a month, you can pay about $50 a month. It makes it easier to budget for monthly expenses and even protects you against emergency situations.

After all, if you have to go to the hospital and now have to pay for a hospital bill along with a higher car loan, you might be in financial trouble. However, having that lower monthly payment ensures that you can put some money aside when needed. Longer loans give you peace of mind that you can afford to pay for your car without breaking the bank.

Yes, the interest is higher because, for the lender, it’s riskier, but who says you can’t make a larger payment once in a while? If times are good, you can always make larger monthly payments to chip away at your loan faster than intended.

Choose Your Car Loan Length Today

Choosing the type of car loan length you want is never easy; thankfully, with this guide, you have a cheat sheet. After all, there are two types of loans: short-term loans and longer loans. Depending on your circumstances, you may want a short-term loan for its decreased interest rate, cheaper loan rate, and overall resale ability.

However, you may decide on a longer loan for its lower monthly payments. There’s no right or wrong answer; the choice simply depends on what you want and what makes sense for your budget.

To learn more about auto loans, apply today.

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