Should I choose a longer or shorter loan term?

Deciding Between a Longer or Shorter 💡 Definition:The length of time you have to repay a loan, typically expressed in months or years.Loan Term💡 Definition:The loan term is the duration for repaying a loan, impacting your monthly payments and total interest costs.: What You Need to Know

Choosing the right auto loan term is a critical decision that can significantly impact your financial health. Whether you're buying a new or used car, understanding the trade-offs between shorter and longer loan terms will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. help you make an informed choice that aligns with your financial goals and budget💡 Definition:A spending plan that tracks income and expenses to ensure you're living within your means and working toward financial goals..

Understanding the Core Trade-Off

The primary trade-off between shorter and longer loan terms is simple: lower monthly payments versus higher total interest costs. Let's break this down:

• Longer Loan Terms: These offer the benefit of lower monthly payments, which can make more expensive vehicles seemingly affordable. However, they also lead to higher total interest costs, extending the time you'll spend paying off the loan. For example, on a $35,000 loan at 9% APR:

  • A 24-month term results in a $1,599 monthly payment with a total interest cost of $3,375.
  • An 84-month term reduces the payment to $563 but increases total interest to $12,302.

• Shorter Loan Terms: While they require higher monthly payments, these terms reduce the total interest paid over the life of the loan. They also help build equity💡 Definition:Equity represents ownership in an asset, crucial for wealth building and financial security. faster, lowering the risk💡 Definition:Risk is the chance of losing money on an investment, which helps you assess potential returns. of owing more than the car is worth (being "underwater").

Current Market Trends

Recent trends reveal a growing preference for longer loan terms. As of Q2 2025, the average loan term for new cars is approximately 68.63 months, while for used cars, it is 67.22 months. Despite relatively stable vehicle prices, many consumers are opting for loans of 84 months or longer, with some even committing to monthly payments exceeding $1,000.

Interest rates also play a crucial role in this decision. As of Q2 2025:

• The average rate for new car loans is 6.80%.
• The average rate for used car loans is 11.54%.

These rates make the choice of loan term particularly significant for used car purchases, where interest costs can escalate quickly.

Practical Examples

Consider these scenarios to understand the impact of your loan term choice:

• Scenario 1: You purchase a new car for $30,000 at an 💡 Definition:The total yearly cost of borrowing money, including interest and fees, expressed as a percentage.interest rate💡 Definition:The cost of borrowing money or the return on savings, crucial for financial planning. of 6.80%.

  • 60-month term: Monthly payment of $590, total interest cost of $5,400.
  • 72-month term: Monthly payment of $505, total interest cost of $6,900.

• Scenario 2: You buy a used car for $20,000 at an interest rate of 11.54%.

  • 36-month term: Monthly payment of $661, total interest cost of $3,800.
  • 60-month term: Monthly payment of $440, total interest cost of $6,200.

Common Mistakes and Considerations

When deciding on a loan term, keep these common pitfalls in mind:

• Overextending: Choosing a longer term to afford a more expensive vehicle can lead to financial strain and higher overall costs.
• Depreciation💡 Definition:The decrease in value of an asset over time due to wear, age, or market conditions. Risk: Longer terms increase the likelihood of negative equity💡 Definition:When you owe more on a loan than the asset is worth—also called being 'underwater'., where you owe more than the vehicle's 💡 Definition:Fair value is an asset's true worth in the market, crucial for informed investment decisions.market value💡 Definition:The total value of a company's outstanding shares, calculated by multiplying share price by the number of shares., particularly with rapidly depreciating vehicles.
• Repair Costs: Financing older vehicles over extended terms can result in significant repair expenses while still under loan.

Financial experts generally recommend limiting new car loans to 60 months and used car loans to 36 months. This strategy helps balance affordability with manageable total costs.

Bottom Line

The choice between a longer or shorter auto loan term should align with your financial situation and goals. Consider your budget, the total interest costs, and the potential risks of negative equity. If a standard 60- or 72-month payment doesn't fit your budget, consider leasing💡 Definition:Contractual agreement to use an asset for periodic payments or reassessing the vehicle you're purchasing.

Ultimately, choose the shortest loan term you can comfortably afford. This minimizes interest costs, helps build equity faster, and ensures greater financial flexibility in the long run. Always remember: if a 48-month loan payment is unmanageable, you might be buying more car than you can reasonably afford.