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Auto Loan Terms

An auto loan term is the amount of time you have to pay off your car loan. Generally, you'll make monthly payments until the term reaches maturity (i.e., until you reach the designated end of the auto loan).

Common Auto Loan Terms

Standard-Term Loans

Until fairly recently, 60-month auto loan terms (5 years) were a fairly common car loan term length. Simply put, if you sign up for a 5-year term, you have 5 years to pay off the auto loan. More specifically, that's one car payment every month for 60 months.

60-month car loans may be appealing, as they will usually come with reasonable monthly payments and interest rates, as compared to auto loans with different term lengths.

Short-Term Loans

Some drivers go even lower, opting for 48-month (4-year) car loan terms. Some car buyers will even sign up for a 36-month term (3 years).

While a shorter term certainly means much higher monthly payments, it also means you end up paying much less in interest over the course of your loan. This is due to interest rates for short-term auto loans typically being lower than longer-termed loans, and the fact that you would be paying the interest over a shorter amount of time.

Long-Term Loans

Recently, more car buyers have been signing on for 72-month and 84-month auto loan terms (6 and 7 years); likewise, this means they have 72 months or 84 months to pay off their car loans. Many buyers do this because longer loan terms tend to bring lower monthly payments. While this might sound attractive, keep in mind that lower car loan payments aren't always an advantage (see Disadvantages of Long-Term Auto Loans below for details).

NOTE: Sometimes, auto loan terms are affected by whether the car is new or used. Generally, used car loan terms aren't as long as new car loan terms. For example, where a new car loan term might be for 60 months, a used car loan term might be for 36 months.

Car Loan Term Effects

Monthly Payments

As mentioned above, generally the longer the car loan term, the lower the car loan payment. Because your loan is spread out over such a long period of time, you can make lower payments until you reach your auto loan term.

On the other hand, if your loan term isn't as long (say, you have a 48-month auto loan term), your payments will be a bit higher. TIP: Reduce Your Term and Payments

Want a short-term loan with lower monthly payments? Try budgeting for a considerable down payment as you shop for your auto loan. Remember, the higher your down payment, the lower your monthly payments.

Interest Rates

Typically, the lower the auto loan terms, the lower the interest rates—unless you're dealing with used cars. Your exact interest rate could depend on current interest rate trends, however, so it's important to keep an eye on dealerships offering low interest rates that line up with the auto loan term length in which you're interested.

In the end, keep in mind that the interest rate can affect how much you actually pay for your vehicle. Remember, for every year you are paying your car loan, you are paying a certain percentage in interest on top of the actual price of the car.

Disadvantages of Long-Term Auto Loans

Although they usually lower your monthly payments, long-term auto loans—such as those for 72 months or 84 months—may not be beneficial.

Basically, long-term auto loans:

  • Bring higher interest rates. Although you're paying lower payments over a longer period of time, you're actually paying more money (because of the higher interest) than you would with a shorter auto term loan. Generally, long-term loans come with higher interest rates.
  • Put you “upside down." Being upside down means you owe more than the vehicle is worth. This is very common with long-term loans, as the car begins to lose value faster than you can pay off the loan.
  • Decrease equity in the vehicle. Your vehicle's trade-in value is decreased when you don't have much equity, which can affect your overall down payment for a new (or even used) vehicle.

While choosing a long-term auto loan with lower monthly payments might seem appealing at first, it could be in your best interests (literally) to choose a short-term car loan with a higher down payment or a less expensive vehicle.

Risks of Early Car Payments

Often called a pre-payment penalty, this penalty comes when a car buyer pays off his or her auto loan before the term is up. Typically, this penalty exists because the lender is losing money (i.e. interest payments) when the car buyer pays off the loan early.

Because a situation might arise when you want to pay off your auto loan early, it's always a good idea to check your loan contract for information about a pre-payment penalty before signing the dotted line.

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