How Long Should My Loan Be?


The term you choose for your auto loan impacts your rates, the total cost of borrowing, and your monthly payment. So if you're wondering which auto loan term to choose, it's a good idea to weigh up the pros and cons of these different factors.

A short loan term means you'll get a lower rate and your total cost to borrow will be lower, but your monthly payment will be higher. A long loan term means the opposite. Read on for full details to help you decide how long your auto loan should be!  

What Is an Auto Loan Term?

A young couple takes a selfie while checking out new cars after learning about auto loan terms.An auto loan term is how long you have to pay back the money you borrowed. Different lenders may offer a different range of terms. Loan terms are usually in 12-month increments and range from 12 to 84 months. 

You get to choose your auto loan term when you apply for the loan. In some cases, you may need a higher credit score to qualify for the longest terms.

How Your Auto Loan Term Impacts Rates

Lenders will offer you an interest rate and annual percentage rate (APR) based on your credit score. 

APR is the amount you pay each year to borrow money, including any lender fees, and it's expressed as a percentage. The interest rate is the amount you pay to borrow money without fees included. It’s wise to use the APR when comparing loans to make sure you are getting the full picture.

A higher credit score can indeed get you lower rates. But remember that auto loan terms will also affect your interest rate and APR. The longer the term, the more interest you'll pay over the life of the loan.

Short auto loan terms usually get lower rates while longer auto loan terms will come with higher rates. This is because lenders consider they're taking on more risk over longer loan terms. That is, your finances may change and you might not be able to make all your payments. 

Check out our useful auto loan calculator to see how different rates affect your monthly payment.

Auto Loan Terms and Total Cost of Borrowing

The total cost of borrowing is the fees and interest you pay on top of the principal amount you borrowed. For example, if you borrow $25,000 and end up paying $2,500 in interest and fees over the life of your loan, then your total cost to borrow is $27,500.

A short auto loan term means you'll pay less interest over the life of the loan so your total cost to borrow will be lower. A long auto loan term means you'll pay more interest over the life of the loan so your total cost to borrow will be higher.

Another advantage of shorter loan terms is that you'll pay your loan off faster and be less likely to end up "underwater" or "upside-down" on your loan. This is when you owe more on your auto loan than your vehicle is worth, often due to depreciation.

Not only will you be paying less in interest with a shorter loan term, but you may also avoid excessive maintenance costs or repairs that come with owning a vehicle for a longer term.

Auto Loan Terms and Monthly Payment

The monthly payment is often the biggest deciding factor when it comes to choosing your auto loan term. Be sure to work out a monthly budget and see what car payment you can afford before you apply for your loan. 

Once you've worked out your budget, you'll know what vehicle purchase price is best for you and what loan term you should choose. Keep these two points in mind:   

  • A short loan term means a higher monthly payment, but you'll get a lower APR and pay less total interest. 
  • A long loan term means a lower monthly payment, but you'll get a higher APR and pay more total interest.

If you're still wondering how long your auto loan should be, the best thing to do is find the sweet spot in the middle. Choose the auto loan term where you can afford your monthly payment but also save on interest.

Then in months when you find you have extra cash, you can pay more than the amount due. That way, you'll pay your loan off faster and reduce your total cost of borrowing. 

The Right Auto Loan Term for You

As soon as you determine the right auto loan term for your situation, it’s time to shop around and see what loan terms are on offer and what rates you can get for your credit score. If your credit isn't so great at the moment, you could take steps to improve it before you apply.

As a credit union, Members Heritage puts its members first and works hard to get you in the driver’s seat at the best rate and with the best loan term. Click below for more details on our auto loans!

Learn More About Our Auto Loans

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