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Complete Guide to Car Loan Terms

Complete Guide to Car Loan Terms

Choosing the right car loan term is one of the most important financial decisions when purchasing a new or used vehicle. The length of your auto loan can have a big impact on your monthly payments, interest costs, and the overall affordability of your car purchase. Understanding the pros, cons, and trade-offs of different car loan terms is key to picking the duration that best fits your budget and financial situation.


In this comprehensive guide, we will break down everything you need to know about car loan lengths. You’ll learn about the most common term options, from 24 to 96 months, and the factors that determine what loan duration makes the most sense for your needs. We’ll outline the benefits of shorter loans as well as when longer 6 or 7-year terms may be appropriate. You’ll also get tips and strategies to calculate the ideal loan term for your next auto purchase.


Whether you are buying new or used, or refinancing a current loan, this article will provide actionable advice on choosing the right car loan length. With this information, you can feel confident you are making an informed financing decision for your situation. Let’s get started understanding the ins and outs of auto loan terms.

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What Is a Car Loan Term?

A car loan term refers to the length of time you have to repay the loan. Most car loans are structured with equal monthly payments over the life of the loan term. The term length directly impacts your monthly payment amount.

With a shorter term like 24 months, your monthly payments will be higher because you are paying off the loan more quickly. A longer term like 72 months spreads the loan repayment over more months, so the monthly payment is lower.

The term length also impacts your total interest costs on the loan. Shorter terms mean you pay less interest overall, while longer terms increase the total interest you pay to borrow the money. However, longer terms reduce the monthly cash flow burden.

Understanding how the loan term affects monthly payments and total interest costs is important when choosing the right financing for your situation.

 

Typical Car Loan Term Options

Car loans are available in a range of term lengths, typically starting at 24 months and going up to 84 or even 96 months. Here is an overview of the most common auto loan term options:

 

24 months – A 24-month term is on the very short end for car loans. This term length results in higher monthly payments, since you are paying off the loan over just 2 years. 24-month loans are rare, but can make sense if you want a very low interest rate or plan to pay off the loan extremely quickly.

 

36 months – A 3-year auto loan used to be the most popular, but has become less common as longer terms gain traction. A 36-month term is one of the shortest available, so you’ll have higher monthly payments but pay less interest over the life of the loan.

 

48 months – Four years is right around the average term length for new car loans. 48 months results in more affordable monthly payments by spreading costs out over a longer time. This term is a happy medium before payments get too drawn out.

 

60 months – Five-year loans used to be on the long side, but are now very mainstream. 60 monthly payments help keep the cost down and make expensive new cars more accessible. This term is widely available.

 

72 months – Six-year auto loans have surged in popularity, allowing lower payments but added interest costs. A 72-month term often represents the longest term before rates start going up.

 

84 months – Seven-year car loans are increasingly common for those looking to minimize their payment amount above all else. The ultra-long term means you’ll be paying interest for years after the car has depreciated significantly.

 

Pros and Cons of 60 Month Terms

60 month auto loan terms are one of the most popular options for financing a new or used vehicle. This 5 year duration provides a balance of affordability through lower monthly payments while avoiding some of the drawbacks of excessively long loans. Here is an overview of the key benefits and potential downsides of 60 month car loan terms:

Pros:

 

  • More affordable monthly payments compared to shorter term loans, making vehicles more accessible.
  • Sufficient time to pay off the loan while still building equity.
  • Interest rates are usually competitive compared to longer terms.
  • Less risk of going “upside down” on loan compared to 72+ month financing.
  • Keeps total interest costs lower than longer term options.

 

Cons:

 

  • Higher monthly cost than very long 72+ month loans.
  • Total interest paid will be higher than shorter term options.
  • Loan may extend past warranty period of some vehicles.
  • Less flexibility if financial situation changes during the 5 years.
  • More difficult to qualify for than longer term options.

 

Overall, 60 month loans offer a middle ground balancing affordability, flexibility, and avoiding excessive interest costs. They provide a reasonable financing option for many car buyers’ budgets and needs.

 

Pros and Cons of 72 Month Terms

72 month car loans are becoming increasingly popular, but it’s important to weigh the pros and cons before committing to a 6 year term.

 

Pros of 72 Month Car Loans

 

Lower Monthly Payments – Spreading out the loan over 6 years instead of 5 years reduces the monthly payment. This can make certain vehicles more affordable on a monthly basis.

Higher Loan Approval – Borrowers may qualify for a larger loan amount with a 72 month term compared to shorter terms. This allows financing more expensive vehicles.

Lower Interest Rates – On longer 6 year loans, the interest rate offered by lenders tends to be lower than on shorter terms. Even half a percent lower can save hundreds.

 

Cons of 72 Month Car Loans

 

Higher Total Interest – Despite the lower rate, paying interest over 6 years rather than 5 costs more overall in interest charges. It adds another year of interest payments.

Increased Risk of Upside Down Loan – Longer terms increase the chance of owing more than the vehicle is worth if trading in or selling before paying off the loan.

Higher Cost of Full Coverage Insurance – Lenders require full coverage for the length of the loan. This adds expense compared to dropping collision after 5 years.

Loan May Extend Beyond Useful Life – The average age of vehicles on the road is 12 years old. A 6 year loan may go beyond the practical service life of the vehicle.

 

Pros and Cons of 84 Month Terms

84 month auto loan terms are becoming increasingly common, allowing borrowers to stretch out payments over 7 years. Here’s an overview of the key pros and cons with 84 month car loans:

Pros:

 

  • Lower monthly payments – With an extra 12 months to pay off the loan, each monthly payment is reduced compared to shorter terms.
  • Allows financing more car – 84 month terms provide the ability to purchase a more expensive vehicle while keeping payments manageable.
  • Easier approval – Borrowers may find it easier to qualify for 84 month loans based on lower monthly payments.

 

Cons:

 

  • Higher interest costs – The longer the term, the more interest paid over the life of the loan. 84 month loans accrue significantly more interest.
  • Higher chance of going “upside down” – Vehicle depreciation means it may be worth less than owed if trying to sell or trade-in early.
  • Outlives usefulness – Most cars do not have a usable lifespan of 7 years, so buyers pay on a vehicle they no longer own.
  • Loan may still be unpaid if circumstances change – Job loss or other factors may make it difficult to continue 84 month term.

 

Overall, 84 month car loans allow smaller monthly payments at the cost of higher long-term expenses. They require careful consideration of budget and needs before committing.

 

How Term Length Impacts Interest Rates

When it comes to auto loan interest rates, the length of your loan term can have a significant impact. Generally speaking, longer loan terms tend to qualify for lower interest rates. This is because lenders consider longer loans to be less risky.

With a longer 6 or 7 year loan, the monthly payments are lower. Since the payments are more affordable each month, the lender is less worried about the borrower defaulting or missing payments. The lender also has more time to earn interest revenue from the loan by stretching it out over a longer period.

On the other hand, shorter 3 or 4 year loans come with higher monthly payments. This represents a greater chance the borrower may struggle with the higher payments and default. As a result, lenders charge higher interest rates for shorter loan terms to offset that increased risk.

The interest rate difference can be substantial. For example, a lender may offer a 5 year new car loan at 6% APR. But stretching the loan out to 6 years for the same vehicle may drop the rate down to just 3% APR. The borrower will pay much less interest over the life of the longer term loan.

While longer loans do enable lower rates, it’s important to weigh the overall costs. Lower monthly payments are attractive, but shorter loans mean you pay off the principal and total interest charges quicker. It’s a balancing act to find the ideal term length for your situation.

 

Recommended Terms for New vs. Used Cars

When choosing a car loan term, it’s important to consider whether you are financing a new or used vehicle. Experts typically recommend shorter loan terms for used cars compared to new.

For new cars, a 60 month term is usually ideal. With a new vehicle that you plan to drive for many years, a 5 year loan spreads out the payments over a reasonable ownership period. Going up to a 6 year term can also make sense for some new car buyers depending on the interest rate and monthly payment affordability.

For used cars, loans longer than 36 months often don’t make financial sense. A used car will continue depreciating in value over the loan term, and you don’t want to end up upside down owing more than it’s worth. Limiting the term to 3 years or less helps minimize depreciation risk.

Additionally, interest rates are generally higher for used car loans compared to new. Shorter terms limit the total interest paid over time. For example, a $15,000 used car loan would accrue approximately $1,800 in interest over 36 months at a 7% rate. The same loan over 60 months would accrue $3,000 in interest – an extra $1,200 paid.

While longer terms may provide lower payments, the higher lifetime interest costs and depreciation risk make shorter terms ideal for used cars. Limiting the loan term to match the expected usable life of the vehicle is smart financial move.

 

Don’t Finance Longer Than Useful Life

When deciding on a car loan term, it’s important not to finance the vehicle for longer than you plan to keep it. Auto experts typically recommend not taking out a loan that lasts beyond the useful life of the car.

For most vehicles, the useful lifespan is around 6-10 years or 100,000-150,000 miles. Financing a new car for 72-84 months means you’ll likely be paying off the loan even after you want to upgrade or replace the vehicle. This results in negative equity that gets rolled into your next auto loan.

To avoid this situation, take into account how many years you expect to drive the car. If you plan to keep it for 5-6 years, a 60 month term is a safer bet. If you want to keep it for 8-10 years, a 72 or 84 month loan may work. But in general, limit the length to when you’ll likely want a different vehicle.

Matching the financing to your intended ownership timeframe helps ensure you can sell or trade in the car without still owing money. It also means you’re not paying interest longer than necessary just to get lower monthly payments. Carefully consider the loan term based on your long-term plans.

 

When Do Longer Terms Make Sense?

While shorter loan terms are generally recommended, there are some specific situations where longer 84+ month car loans may make sense for your budget:

 

  • You need a lower monthly payment – If you have limited income or other large monthly expenses, a longer term can help keep the car payment affordable each month.
  • You plan to keep the car long-term – If you intend to drive the vehicle for 7-8 years or more, an 84 month loan may align better with how long you plan to own it.
  • You have strong credit – Longer loans often require excellent credit, so borrowers with scores above 720 may qualify for the best extended term rates.
  • You make extra principal payments – Paying extra each month can negate some of the higher interest costs of a lengthy loan term.
  • You have a large down payment – Putting down 20% or more reduces the risk of owing more than the car is worth later on.

 

While tempting for the lower monthly costs, long auto loans are risky and not the best idea for every buyer. Carefully consider the total interest paid over the life of the loan and make sure your budget can handle the payments comfortably.

 

The Risks of Long Loan Terms

While longer loan terms of 72 months or more can reduce your monthly payments, they do come with some risks to be aware of.

One of the biggest risks with long auto loans is going “upside down” on your car loan. This means you owe more on the loan than the car is actually worth. This typically happens because cars depreciate rapidly in the first few years after purchase. With a longer 6 or 7 year loan, you are more likely to end up owing more than the car’s value if you want to trade it in or sell it.

Going upside down makes it very difficult to get out of your loan if your circumstances change. You would need to come up with extra money to pay down the loan balance to match the car’s depreciated value.

Longer loans also mean paying more interest charges over the life of the loan. While the monthly payment is lower, you end up paying thousands more in total interest costs over the full loan term.

There’s also a risk of the loan term being longer than the useful life of the vehicle. This means the car is worn out or needing major repairs once you finally finish paying it off. Ideally you want the loan term to match the years you plan to drive the car.

It’s important to carefully consider affordability as well. Just because a lender approves you for a 6 or 7 year loan does not mean it is financially wise to take that term length. Stretching out payments over that many years ties up a lot of your income. Make sure to budget properly so you are not over-extending yourself.

 

How to Choose the Right Car Loan Term

Choosing the right car loan term is an important part of the auto financing process. The loan length you select can have a big impact on your monthly payments, total interest costs, and the affordability of the vehicle.

When picking a car loan term, here are some key factors to consider:

 

Determine Your Budget

The first step is to look at your household budget and expenses. Make sure to account for not just the car payment, but also insurance, gas, and maintenance. Experts recommend keeping total transportation costs below 10-15% of your monthly income.

Based on your budget, you can calculate what monthly payment on a car loan you can realistically afford. Then, you can back into loan terms that allow for that payment. Aim to not exceed your comfortable budget just to get a lower monthly payment.

 

Calculate Total Interest Costs

Next, use an auto loan calculator to estimate total interest costs for different loan terms. Keep in mind that longer terms have lower monthly payments but higher overall interest.

Run the numbers on terms like 60, 72, and 84 months to see the impact on interest. This can help determine the “sweet spot” where you balance affordability with minimizing total interest paid.

Opting for too long of a term just to get lower payments may cost much more in interest over the life of the loan.

 

Paying More Each Month

While choosing a longer loan term can lower your monthly payments, paying more than the minimum due each month has significant benefits. By making extra principal payments, you can pay off your loan faster and reduce the total amount of interest paid over the life of the loan.

Even an extra $50 or $100 per month can make a big difference. For example, on a $25,000 loan at 4% interest over 60 months, paying an extra $100 monthly allows you to pay off the loan in 52 months instead of 60, saving nearly $500 in interest.

Setting up automatic payments for a higher amount is an easy way to build extra principal payments into your monthly budget. You also have the flexibility to pay more some months and less during months when money is tighter.

Prioritizing early repayment of the loan principal provides the most savings, as you reduce the balance accruing interest each month. Paying down the principal faster also helps you build equity in your vehicle.

While a longer loan term may be necessary to get an affordable monthly payment, paying extra each month is a smart strategy to pay off your loan faster and for less. Even small increases to your payment can accelerate your payoff date and interest savings.

 

Key Takeaways on Car Loan Terms

When choosing a car loan term, it’s important to balance getting an affordable monthly payment with minimizing interest costs over the life of the loan. Here are some key tips to keep in mind:

 

  • For most borrowers, a 60-month term offers a good compromise between payment and interest. 72 months is also common but starts to get lengthy.
  • Carefully consider if you can afford the payments of longer 84+ month loans. The lower monthly costs often backfire over time.
  • Don’t finance for longer than the useful life of the vehicle. You don’t want to be paying on a car that needs replacing.
  • New cars can be financed for longer than used, but no more than 60 months is recommended for a used vehicle.
  • Paying more than the minimum due each month can help you pay off the loan faster and save on interest.
  • Avoid loans where you’ll be “upside down” owing more than the car is worth.

 

By educating yourself on loan terms and carefully evaluating your budget, you can pick the right duration for your needs when financing a car.

 

Conclusion

In summary, choosing the right car loan term comes down to carefully evaluating your budget, the total interest costs, and how long you plan to keep the vehicle. While shorter loan terms of 3-5 years are generally recommended, there are certain situations where a longer 6 or 7-year loan may be appropriate if the payment fits your budget.

The ideal loan length balances affordability of monthly payments with minimizing interest fees and not being underwater on the loan. Work through different scenarios to find the term that optimizes for your needs. Don’t just default to the longest term offered – do the math on total costs.

Be sure to only finance for as long as you plan to own the car. And know you always have the flexibility to pay extra or pay off the loan early to reduce the interest costs. Taking some time to choose the right car loan terms can save you thousands over the life of the loan.

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Questions About Car Loan Terms

 

The typical car loan terms in Canada range from 24 to 84 months, with 60 and 72 months being the most popular. Some lenders offer loans up to 96 months, but these longer terms can lead to higher interest costs and being upside down on your loan. When choosing a term, balance monthly payments with total interest paid. Shorter terms have higher payments but lower rates.



Financial experts generally recommend car loan terms of 60 months or less for new vehicles and 36 months or less for used. These shorter terms help keep interest costs down, allow you to build equity faster, and avoid negative equity situations. Ultimately the ideal term depends on factors like the car price, down payment, interest rate, and your budget.



The average interest rate on new car loans in Canada is around 5-7%, while used car loans average 6-9%. Rates vary considerably by lender, credit score, loan term, down payment, and other factors. Getting pre-approved can help you secure a competitive rate before negotiating with the dealer. Those with excellent credit may qualify for 0-2%.

The average monthly car loan payment in Canada is $525 for new vehicles and $398 for used. However, payments can range from under $200 up to over $1,000 depending on the vehicle price, down payment, interest rate, loan term, taxes, and fees. Carefully consider total affordability rather than just the monthly payment.



Financial experts caution against spending more than 10-15% of your monthly gross income on auto loan payments. This percentage ensures you have enough income left over to cover other necessities like housing, food, and savings. Those with tight budgets may want to aim for less than 10%.

The 20/4/10 rule recommends putting down at least 20% of the car’s purchase price, financing for no more than 4 years, and keeping total vehicle expenses (loan, gas, insurance) under 10% of gross monthly income. This helps ensure affordability while building equity and avoiding negative equity.

Longer terms of 72+ months have lower monthly payments but pay significantly more interest over the life of the loan and increase the risk of negative equity. Shorter terms have higher payments but you pay off the loan faster, save on interest, and build equity quicker. Overall shorter terms are recommended whenever possible.



Most Canadian lenders top out their car loan terms at 84 months (7 years). A small number may offer loans up to 96 months, but terms this long are not recommended as they lead to exorbitant interest charges and negative equity situations. 60-72 months is most common for new cars, while used cars should be 36 months or less.



To qualify for the lowest interest rates, you typically need a credit score of 720 or higher in Canada. Those with scores in the 660-719 range can expect decent rates, while subprime borrowers under 660 will pay the highest rates. Improving your credit before applying for an auto loan can save you thousands in interest.

Typical documents needed for a Canadian car loan application include: valid driver’s license, proof of income (pay stubs), proof of address, list of assets/liabilities, down payment source documents, proof of auto insurance, and vehicle information (if applying for a used car loan).

Yes, getting pre-approved before visiting the dealership can give you strong negotiating leverage on the car price and loan terms. The pre-approval shows the dealer you are a serious buyer and locks in an interest rate. Just make sure it is a hard credit check pre-approval, not just a soft credit check pre-qualification.

Watch out for admin fees, documentation fees, loan processing fees, lien registration fees, and extended warranty fees. Many of these can be negotiated out or reduced. Avoid credit insurance and debt cancellation add-ons as these provide little value for their high cost. Carefully read all loan documents.

Leasing means you rent the vehicle for a fixed term, after which you return it or buy it outright. Financing means you borrow money to purchase the vehicle outright, making payments until you own it free and clear. Leases have lower monthly costs but you build no equity; financing has higher payments but ownership.



If your auto loan interest rate is under 5%, you may want to consider investing extra money rather than paying down your car faster, as you can reasonably expect to earn a higher return investing. If your rate exceeds 5-6%, prioritize paying the loan down first before investing.

Yes, most major banks and dealerships offer car loans tailored to those with poor or no credit. Interest rates are much higher, but they provide a way to finance if you have limited options. Building your credit first is recommended whenever possible though to save on interest costs.



The best rates are typically found at online lenders, credit unions, and major banks. Using aggregator websites like RateHub and Loanz.com allows you to easily compare multiple lender rates. Rates will also vary depending on province, so be sure to compare options available where you live.

Trading in can help lower your sales tax bill and provide a chunk of cash towards your new car purchase to reduce financing needed. However it also gives away equity you have built in your current vehicle. Consider selling it privately if it has significant market value beyond the trade-in amount.

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