Three things about buying a car or truck are fairly indisputable: it’s generally an expensive purchase, the smartest financial move would be to save up and pay in cash, and most people can’t manage No.2 so they finance the purchase instead.
When considering an auto loan, one of the most important decisions is how long a term to choose. What the car dealership tries to steer you towards may not be your best option, and following the national trend may not be in your best interests either.
That’s because vehicle buyers are choosing longer and longer loans. Historically, 3- and 5-year auto loans were the most common. But the average existing car loan is now up to almost 6 years, according to Experian’s Automotive Industry Insights report for Q2 2020.
But choosing a longer loan carries risks. For one, interest rates are higher on longer terms. Though your monthly payment will be lower, you’ll pay significantly more interest over the course of the loan. For example, a $25,000 auto loan at 5% for 36 months will cost you $1,964 in interest, while you’ll pay $4,232 in interest on a 72-month loan at 5.25%.
Also, longer loans make it more likely you’ll be repaying the entire time you own your vehicle, since the average ownership duration is 6-7 years. Additionally, as your car ages, you’ll need to start shelling out for repairs and maintenance, which can make it harder to afford your car payment.
Lastly, contemplating a longer loan often leads to choosing a more expensive vehicle. Because the monthly payments are smaller, dealers will point this out to make more expensive models look more affordable. The better choice is to spend only what you can afford, and with the shortest term you can reliably afford.