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How Long is the Average Car Loan?

By Michael O'Connor | October 14, 2021

The average new car loan is 70 months while the average used car loan is 65 months.

Taking out a loan for a car is a big commitment that can be intimidating if you don’t know what to look for. There are a lot of different factors at play that can make your car payment simple or incredibly complicated. One of the most important things to consider when taking out a car loan is its length.

Many things will determine the length of your loan and whether or not it will work for you. By knowing what the average car loan length is, you can understand what you’re getting into when you sign the paperwork for your new vehicle.

How Long is the Average Car Loan?

New Cars: As of 2021, the average loan term for a new car is 70 months. This is one of the highest averages of all time with most new car loans having 72-month terms. The second most common is an 84-month loan. In the last decade, new car loan terms have increased in length by about 29 percent.

Used Cars: The average length of a used car loan is 65 months. Like with new cars, the most common loan term for used vehicles as of 2021 is 72 months. Even though used cars are generally around $10,000 less than new ones, consumers are taking the same amount of time to pay off the sticker price of the vehicle.

How is the Length of a Car Loan Determined?

The length of a car loan will depend on the person taking out the loan and their individual circumstances. There are a lot of different things at play when a dealership or bank determines the terms of a loan and many of them will have to do with your specific financial situation. Knowing what these factors are can help you get the best possible loan terms for you and your needs.

Down Payment: The amount you can put down on a car will have a lot to do with the length of the car loan. The more you can knock off the sticker price before you even sign the papers for the loan, the shorter that loan will be. This can allow you to make fewer payments and gain full ownership of the car faster.

Monthly Payment: Your monthly payment amount will also determine how long you will have to make those payments. If you can afford to pay a larger percentage of the total loan monthly, you can reduce the amount of time you owe the loan. This can also help you pay less in interest over the course of paying off the vehicle.

Interest Rate: The interest rate you qualify for will have a lot to do with the final cost of the vehicle. If you don’t qualify for a lower interest rate, the total loan amount will end up being much more. This can add months to your loan term. In turn, you will also end up paying more in interest throughout this longer loan. This cycle is how people end up paying much more for a new or used vehicle than they should.

Credit Score: Your credit score is one of the most important deciding factors in what kind of car loan you will be able to get. If you have good credit, you will qualify for a lower interest rate, which can greatly reduce the amount of time you will have to spend paying off the car. You can also get access to better lenders and institutions that will have much better loan terms.

Potential borrowers are generally placed into categories depending on their credit score. For example, subprime applicants have an Experian credit score between 501 and 600. Prime applicants have a score between 661 and 780. Depending on where you fall on this spectrum, you can end up paying a difference of thousands of dollars over the length of your auto loan, which will affect how long your loan terms are.

Lender: Where you get your loan will also have a big effect on how long it will be. Generally, getting a loan from the dealership will get you the highest loan rates. A dealership or automaker may mark up their interest costs and will also apply more pressure when it comes to actually sign the deal. If you haven’t shopped around, you could end up with a loan that is too long and too high.

Getting a loan at a bank is almost always a better option. In many cases, you can get preapproved for the loan, which will take some of the pressure off the sales portion of your car buying experience. They will also offer much better interest rates and you can usually see the loan terms without impacting your credit report. This allows you to get a shorter loan time and end up paying less in the long run.

Why Longer Auto Loan Terms Matter

Negative Equity: Negative equity is one of the most important things to avoid with a car loan. This is when you end up owing more for the total cost of a car than it is worth. It is also sometimes known as being upside down on the car. Depending on the rate of depreciation with your vehicle, this can happen with longer loan terms. It can also happen if you are in an accident where the vehicle is totaled or if you want to sell the car. In those instances, you will still owe money on your loan even though you don’t have the vehicle.

Vehicle Ownership Times: On average, most car buyers want to sell or trade-in a new car after 79 months and a used car after 66 months. If you have taken out a 72-month loan on a used car and want to sell it at 66 months, you will still owe half a year of payments on that vehicle. By taking out a short-term loan, you have the freedom to change your car more often.

Higher Interest Rates: Perhaps the biggest factor to think about when getting a long-term auto loan is what you will end up paying in interest. For example, if you want to finance a new vehicle for $31,070 with a 72-month loan and you pay the average interest rate, which according to Edmunds is 6.9 percent, you will end up paying $6,962 in interest throughout your loan.

If you had the same rate for a 60-month loan, you will only be paying $2,593 in interest for your car purchase. This is a savings of $4,369 by simply paying off your loan one year earlier. While the monthly payments may be higher, you are saving so much in interest that it might be worth the extra monthly expense.

Ability to Pay Long-Term: Something to consider when getting a car loan is the fact that financial situations can change. If something should happen like you lose your job or you want to purchase a new house, having a car loan to pay for can be a major financial burden. The sooner you can pay off your loan, the less likely you will be to run into monetary hardship and lose your ability to pay.

Repair Costs: No matter how well you take care of a new or used car, the odds are good that you will have to make some repairs sooner or later. The longer your loan is, the more likely it is that you will need to do some sort of major repair. Having these two costs at the same time, as well as the increase in car insurance cost, can be a financial burden that can even put you in negative equity if the repair is substantial enough.

How to Avoid a Long Car Loan Length

Use a Credit Union: If you are able, getting your car loan through a credit union will always be your best option. Credit unions reinvest their profits in their membership, which allows them to offer the lowest interest rates available on the market. They are also going to be more likely to approve you for a loan if you have bad credit. Becoming a member of a credit union will depend on where you live or work, but if you qualify it can be well worth it.

Consider Buying Used: The less expensive a vehicle is, the shorter your loan can be. Used cars are generally thousands of dollars cheaper than new vehicles and this can allow you to get better terms for your loan. You can even get certified used cars from a dealership as well as cars that are as close to new as possible if you don’t want to worry about mechanical issues down the line.

Lease a Car: If you are set on driving a new car, leasing could be a great option. With a lease, you make monthly car payments that are calculated based on how much the car is worth as well as how much it is going to depreciate. Leases are generally for two or four years and can have very small down payments, which makes them a good choice for people who don’t want to be locked into a long loan.

Put Down More Money: The best way to get a shorter lease is to pay a higher down payment. The more you can pay off the car’s value upfront, the shorter your lease terms will be. Saving up more money may take longer but you will end up paying smaller monthly payments as well as paying much less in interest over time.

Final Thoughts

The term length of the average car loan is a great indicator of what you should look for when you go to purchase a new or used vehicle. Whether you are trying to get lower monthly payments or just want to make sure you have the freedom to change vehicles, the right car loan can make you feel more confident at car dealers. Knowing the average as well as what you can do to get better terms and pay less can help you get the best loan for your specific needs.