How Long Should Your Auto Loan Length Be?

March 2024Dad giving car keys to son

If you’re shopping for a new ride, you’re probably considering how to budget for monthly payments on your auto loan. While auto loans traditionally last 60 months, you may have the option to choose a shorter or longer term. Both options come with implications for your monthly payment and the amount of interest you’ll pay, so consider the following factors before you sign on the dotted line.

Loan length and monthly payments

Longer and shorter loans have their perks. Compared to a standard 60-month auto loan, a 72- or 84-month term will have lower monthly payments, but you’ll pay more in interest over the years. On the other hand, a 24-, 36-, or 48-month term will have you making larger payments every month, which means you’ll have full ownership of your vehicle faster and less of your money will go to interest.

If you’re trying to decide which option best suits you, Bankrate suggests using an auto loan calculator to get a feel for both your monthly payments and the amount of interest you’ll end up paying throughout the life of the loan.

Think before you choose a longer loan

If you’re on a limited income, the lower monthly payments of a longer loan may seem appealing. However, consider the bigger picture before locking yourself into an extended auto loan. Due to the natural depreciation of a vehicle, NerdWallet contributor Philip Reed warns that a longer loan could result in you owing more money than the vehicle is worth.

Furthermore, Reed explains that interest rates tend to be higher for terms over 60 months, meaning you’ll be shelling out more money just for the privilege of having a loan. And finally, Reed cautions that by the end of your 6- or 7-year auto loan, your vehicle may need costly repairs — especially if you bought used. Therefore, by opting for a longer term, you could be setting yourself up to handle a car payment while also managing repair costs.

Pros and cons of shorter loans

Shorter terms translate to lower interest rates, and less money spent on interest, overall — as long as you can afford the higher monthly payments. A shorter loan will also result in you fully owning your vehicle faster and being free of the monthly payment sooner than if you’d opted for a loan that lasts five years or longer. That means you’ll be able to resell your vehicle sooner, before depreciation eats away much of its value.

If you love to drive the latest models or think you’ll need a different type of vehicle in a few years, a shorter loan might suit your needs. Plus, Bankrate explains that a shorter loan can help you avoid being upside down on the value of your vehicle.

Before you decide which loan length is right for you, be sure to consider the cost of the vehicle, your down payment amount, and other costs associated with vehicle ownership, such as insurance, maintenance, and gasoline. For more guidance, talk with a Personal Banker at any Waukesha State Bank office to find out which option would be best for your needs and your budget.