A car is usually your most expensive purchase besides your house. You may be looking for a new car and a new loan every few years, often as fast as you pay off your latest loan. You have several options for car loans, from auto manufacturer credit companies, dealerships or financial institutions like banks and credit unions. Interest rates will vary, with locale and with the type of financing. You always want to shop loan providers to find the best combination of interest rates and loan length for an affordable monthly payment.
Borrowers are often allowed to select the term of their car loan, which can range from three to seven years.
Monthly Payment Considerations
What monthly payment you want or can afford generally helps determines how long your car loan is for. Other considerations are the total price of the car, whether it is new or used, your total debt and credit rating and the interest rate. You can get car loans for periods from 24 to 84 months on most vehicles.
Typical Loan Lengths
Most car loans are 36, 48 or 60 months. Shorter loans usually require very high monthly payments. Most lenders are reluctant to make 72 and 84-month loans, except on very expensive vehicles. You're more likely to get a longer-term loan with a new or slightly used vehicle and many lenders won't make loans on low-value cars or those more than seven years old.
Total Loan Cost
Balance the length of the loan against the interest rate. The longer the term, the lower the monthly payments. Some dealers offer zero-percent interest loans but these often require higher down payments or other conditions. Longer term loans generally have higher interest rates but offer lower payments. A 36-month loan at 5 percent on a $22,000 car will cost about $659 a month, but only $354 for 72 months. However, you'll pay about twice as much total interest on the longer loan.
Calculate and Negotiate
Use a loan calculator to help you work out the best deal before you negotiate with the dealer. Bankrate.com and CarsDirect.com offer free calculation programs to help you assess interest rates, loan length and other terms to decide what you want to pay monthly. Once you have a payment in mind, negotiate with the dealer or a financial institution for specific loan terms.
Lender Loan Approval
In some cases, the length of a car loan is determined by the lender. The better your credit history and current income, the more likely you are to get approved for a loan with a shorter-term. Longer loan terms bring down your monthly payment obligation, which means someone with less than perfect credit is more likely to get approval from a lender.