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How Long Should a Car Loan Be?

When it comes to thinking about your next car purchase, it’s fun to consider all the options – color, model, leather interior – bells and whistles galore! U also want to think about your finances. And doing so isn’t just how much car you can afford, but how long you want to be paying off your car loan.

Cartoon emu looking at his watch with the words How Long Should a Car Loan Be above the UMe logo.

The length of a loan – or its “term” – can have a big impact on your overall financial picture and, more importantly, your monthly budget.

At UMe, we strive to keep U driving with confidence – confidence on the road and confidence in your finances and budget. We offer flexible financing up to 125%, manageable monthly payments, and no payments for the first 90 days.

Keep reading to learn about how long a car loan should be and what your loan term can mean for your unique situation.

Loan Term Explained

When it comes time for you to finance a new or used car, you will have to balance how much you pay each month for the car loan based on how many months you sign on to pay off the loan. This is called your loan term.

A car loan term simply means how long you’ll be financing (AKA making payments on) the vehicle. Most car loans are available in 12-month increments, lasting between two and eight years. The most common loan terms are 24, 36, 48, 60, 72, and 84 months.

So, how do U choose? And what are some pros and cons of the different loan terms? To determine how long a car loan should be, you have to look at the other factors that make up the financing picture.

Down Payment and Interest Rate

You may think picking a loan term is just a matter of steering your car in one direction or another: A larger payment for a shorter term or smaller payments over the longer term. Don’t go speeding through those assumptions because there is a bit more at work here.

Down Payment

You probably already know that a down payment on a car is a smaller percentage of the vehicle’s total cost. While you pay a down payment at the time you buy your vehicle, the remaining balance is the amount you’ll be financing.

The general recommendation for a down payment is between 10 to 20 percent of the vehicle’s total price. With car prices on the rise, putting down that amount of money may seem daunting. But a larger down payment can save you money overall when it comes to one crucial element: the interest rate of your loan.

Interest Rate

For an auto loan, the interest rate is the cost you pay each year to borrow money expressed as a percentage. This isn’t the full story — you also need to look at the Annual Percentage Rate (APR), which is the cost you pay to borrow the money including any associated fees.

Every month that you make a payment on your loan, you pay down the principal as well as paying the interest. If you spread your financing over several years, you will end up paying more in interest. This can ultimately result in you owing more on your car than it is worth.

Yeah, you guessed it — no one wants to be in that situation! We’ll talk more on that later but know that, at UMe, we want to keep you owing less and saving more.

Longer Term vs. Shorter Term

As with any decision, the loan term you choose is based on your circumstances and financial situation. But a general rule of thumb is to avoid longer loan terms if possible.

Why? Interest payments. The longer you borrow money, the more interest you’ll pay. It’s really as simple as that.

How It All Works

Here is an example that can illustrate the difference your car loan term can make.

Let’s say you find the car of your dreams. After your down payment, you end up financing $20,000 at 4.5% APR. If you take out a loan with a 48-month term, your monthly payments will be around $365. The total interest you’ll pay over the life of the loan is approximately $1,500, making the total cost of the loan about $21,500.

If you are looking for lower monthly payments, see what happens if you extend the loan amount to 72 months with all other factors the same. Your monthly payment is now about $255, which saves you about $105 per month. However, over 72 months, you will end up paying about $2,300 in interest. This brings the total for the loan to $22,300.

The 48-month loan term saves you over $1,000 in interest payments, but you will spend more per month on your loan payment to get that savings.

If you can afford the higher car payment, you’ll save money overall, though!

The TLDR breakdown:

  • $20K car loan with a 4.5% APR over 48 months (4 years) = $21,500 which includes 1.5K in interest
  • $20K car loan with a 4.5% APR over 72 months (6 years) = $22,300 which includes 2.3K in interest

How to Pick the Right Term for U

UMe knows U want to get down to business. So, how long should a car loan be?

The first step – as with any major purchase – is to take a look at your budget. Consider how much car you can afford overall. Think about everything that goes into owning a vehicle. If this feels overwhelming, take a deep breath and remember that there is no single solution that works for everyone. (And don’t forget we’re here to help U!)

Long-Term Auto Loan

This is, of course, an option if you cannot afford a higher monthly payment. But you will pay more interest overall and the risk that you’ll be upside down on your loan increases. This means you may end up owing more than your car is worth.

And that can put you in a bit of a pickle, if something goes wrong.

Say your car is stolen or you get into an accident and the car is considered a total loss, your insurance will only pay for the “actual cash value” of the car. If you owe more than your car is worth, you’ll have to come up with the cash to pay the difference between the actual cash value and what you still owe.

While GAP insurance can help lessen the blow, it’s still best to avoid owing more than your car is worth. Being upside down on any loan can have a snowball effect on the rest of your finances. Your financial health is important to us!

Short-Term Auto Loan

Short-term loans mean you pay less interest and you own your car, outright, even faster. But if your budget is tight, a short-term loan may seem too risky. This is when you can adjust your down payment amount. Or if you want to stick to those shorter terms, you may have to readjust your car selection.

A short-term auto loan lessens the chance that you will be upside down on your loan. This can help you keep all your finances in check.

A shorter-term loan may not always be an option for the car of your dreams. We know that can be a bummer. But if a less expensive car can keep you from taking out a longer-term loan, it may be worth the compromise.

Let UMe Help U Decide How Long a Car Loan Should Be!

Thinking about different loan terms can get confusing, but you’re not in this alone. We’re here for U! Remember, if it matters to U, it matters to Me (all of us) at UMe!

No matter the length of your car loan, you should compare rates to make sure you get the best deal possible. Here at UMe, we offer flexible financing up to 125%, manageable monthly payments, and no payments for the first 90 days.

Contact us today to go over your car-buying options. If you want to crunch some numbers right now, check out our handy online calculator to figure out your monthly car payment.


Calculate your monthly payment using our payment calculator.


Disclaimer: U matter to Me (all of us) at UMe — and that’s why we do our best to deliver helpful information on our blog. Please note the following: (1) UMe Credit Union works hard to make certain that the information we post here is as accurate as humanly possible. But as you know, information can change and evolve quickly. While we try to update the blog on a regular basis, the content of some older posts may not be correct or up-to-date. (2) Some destinations on the World Wide Web that we link you to will exist on external websites. UMe Credit Union does not officially endorse any connected sites, nor do/did we compensate or get compensated by any entities to be featured in our posts (unless otherwise noted). (3) Everyone’s situation is unique and we advise you to consult with our personal bankers or your finance, tax, or legal professional for advice individualized to you!