Car Loan Terms: What is a Good Length?

Car loan terms are integral to every car finance or leasing contract. How can you gauge the right length of loan to meet your needs? Here are some considerations.

Typical Car Loan Contract Lengths

Car loan terms are calculated according to the number of months in the contract, as one parameter. Most car loan calculators list 24-, 36-, 48-, 60-, and 72-months. Most consumers opt for a 36-month loan, 48-month loan or 60-month loan. Very few lenders will go beyond a 72-month loan contract, except for very expensive vehicles.

Tip: The car needs to be acceptable to the lender. Some won't do car loans for vehicles older than 7 years. Car loans are secured loans, secured by the vehicle. If the borrower defaults, the car is repossessed.

Tip: Choose the car loan length that works best given particular circumstances. Shorter terms are best; the car will be paid off sooner.

Car Loan Terms Include Interest and APR

Selecting the right car loan terms also means paying attention to the interest rate for the particular length of contract as well as the annual percentage rate (APR). Using loan calculators available on many websites, plug in the desired amount of payment, term of loan, credit history and sales tax rate. The calculator will show the maximum amount of loan available for a purchase or lease contract.

Tip: You can lease a more expensive vehicle for the same monthly payment than you can buy one. The trade-off is that at the end of the lease, you don't own the vehicle.

Tip: Interest rates may be more expensive on 48- or 60-month loans to get you that lower monthly payment. A 36-month loan allows you to pay off the contract quicker but you'll have higher payments.

Tip: Ask about special low-interest financing, available usually on only selected models. A 0 percent or 1.9 percent interest rate on a 60-month loan is obviously more attractive than 6.9 percent on a 36-month contract. In this case, the best loan length may be the longer lease.

Check Extra Fees and Charges

Factor in any additional fees and charges that will be tacked onto the car contract. These include mandatory registration fees, sales tax, tire fees, document prep fees, and other agreed-to items such as dealer-installed options or special extended warranties. Why pay for add-ons that bump up your monthly payment? Either pay separately or do without the additions.

Down Payment Lowers Amount To Finance (Or Lease)

Putting a down payment of $5000 lowers the total amount to finance or lease. Some car loan calculators allow input of down payment, vehicle price, trade-in value (if any), sales tax (percent), interest rate, and terms. The result is the amount of the monthly payment. Plug in various down payment amounts and/or length of term to get to a comfortable monthly car payment. This is a good way to calculate the right length car loan term.

Type of Vehicle Determines Loan Rate

Car loan terms vary depending on the type of vehicle you're attempting to buy or lease. Some cars have higher resale prices than others and therefore have lower rates.

Tip: Hot-selling cars typically have higher resale prices. But you may not get the best car loan terms from carmaker finance companies. Try banks and credit unions instead.

Car Loan Terms and Your Credit

Despite the fact that better loan terms exist, they may not be available - without strong credit. Make sure you have an excellent credit rating. Repair any negative items and build up your good credit for 6 months before you buy a car.

Bottom line: If the interest rate isn't prohibitively high, the shortest car loan term is the best. If a term is too long a term, a borrower will wind up paying more than the vehicle is worth.

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