Typical Terms for Car Loans and Your Options

You're considering a car loan, and you're not sure what to expect. Car loan terms can be complex, but understanding the basics can help you make a more informed decision.

The length of a car loan can vary, but most loans range from 24 to 84 months, with 60 months being the most common term. This means you'll be making payments for two to seven years.

Some car loans come with a fixed interest rate, while others have a variable rate that can change over time. A fixed rate can provide stability, but it may not be the best option if interest rates are low.

The down payment required for a car loan can also vary, but it's typically 10% to 20% of the purchase price. This can help you avoid paying private party loan interest, but it also means you'll have less money available for other expenses.

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Car loan terms can be complex, but understanding the basics can help you make informed decisions. The average new car loan term has risen to 68.48 months, with some borrowers facing even longer terms, especially those with lower credit scores.

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A longer loan term may offer lower monthly payments, but it also means you'll pay more in interest over the life of the loan. For example, a 72-month loan can cost you almost twice as much in interest as a 48-month loan, with an additional $4,337.74 in interest payments.

You can use the total financing costs table to compare different loan terms and see how much you'll pay in interest. Here's a breakdown of the total financing costs for a new vehicle with a $47,000 purchase price and a 6.84% interest rate:

By comparing these numbers, you can see how much more you'll pay in interest for a longer loan term.

Shopping around for financing is key to getting a good deal on your car loan. You have two car financing options: direct lending or dealership financing. Direct lenders like credit unions or banks offer pre-approved auto loans, which can help you negotiate terms with dealers.

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The average new car loan is a record $41,665, with a $700 average monthly payment, according to Lending Tree. To get the best deal, shop around for direct lenders and get pre-approved for an auto loan.

A down payment can also help you negotiate a better interest rate. A larger down payment may reduce your monthly payment and your total cost of financing. The more you put down, the less you need to borrow.

To make a shorter loan term work for you, consider choosing a used vehicle, making a bigger down payment, or shopping around for the best deal. New vehicles lose significant value in the first year after purchase, so a used vehicle may be a more affordable option.

Here are some tips to keep in mind when shopping for financing:

Remember, shopping around for financing can save you money and help you get a better deal on your car loan.

Loan duration refers to the length of time it takes to pay off a car loan. Typically, auto loans are offered with terms of 48, 60, 72, or 84 months.

The average new car loan term has been increasing, with the latest Experian State of the Auto Finance Market report showing an average term of 68.48 months in the second quarter of 2024.

Average loan terms vary by credit score, with super prime borrowers having an average loan term of 64.04 months, and deep subprime borrowers having an average loan term of 72.24 months.

The Experian data also shows that nearly 70% of new car loans have terms of 61 months or more, with a significant increase in the percentage of loans in the 61- to 72-month range.

Here's a breakdown of average new car loan terms by credit score tier:

New car lease terms have also been holding fairly steady, with an average term of 35.86 months in the second quarter of 2024.

Buy Here, Pay Here loans are in-house financing, but the house usually wins, with only 7.6% of loans issued by these dealerships.

These types of loans are often offered to subprime borrowers and come with high-interest rates.

The loans are secured by the vehicle, which means the dealer can repossess the car and sell it again if the customer can't afford payments.

This practice is notorious among BHPH dealers, who make a profit from the down payment and the sale of the repossessed vehicle.

A “no credit check” or “buy here, pay here” auto loan is offered by dealerships that finance loans in-house to borrowers with no credit or poor credit.

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Banks are a good place to get pre-approved for a car loan, but they've become less popular since the Great Recession.

Historically, banks were the biggest lenders in the auto loan market, but they now account for 25.7% of the new car market.

Banks were more reluctant to issue car loans after the Great Recession, making way for captive finance companies to become popular.

Getting pre-approved from a bank can serve as a valuable reference point when shopping for a car loan.

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Online lenders offer a convenient way to compare loan offers from different lenders. LendingTree, MyAutoLoan, and Clearlane (a branch of Ally Financial) are three online services that collect loan offers for you to compare.

You can get loan offers from multiple lenders with just a few clicks. Clearlane, for example, is a branch of Ally Financial, a well-established financial institution.

LendingTree and MyAutoLoan are two other popular online lenders that can help you find the best loan for your needs. Auto Credit Express specializes in loans for people with poor credit.

LightStream, offered by SunTrust, issues online loans to customers with excellent credit.

Captive finance companies, like those owned by major automakers, account for 44.2% of auto loans and 61.2% of new car loans. They often offer promotions like 0% interest for a certain number of months or rebates, but these incentives are usually reserved for customers with excellent credit.

These captive finance companies can make a big difference in the car-buying process, especially for those with good credit. However, it's essential to note that those with lower credit scores may not qualify for such deals.

Auto loans can be offered with terms of 48, 60, 72, or 84 months. The average term for new car loans has been increasing, with a slight rise to 68.48 months in the second quarter of 2024.

Captive Finance Companies are a common type of car loan provider, accounting for 44.2% of auto loans and 61.2% of new car loans.

Many major automakers have their own captive finance companies, such as Ford and GM, which can make deals with promotions like 0% interest for a certain number of months.

These promotions are usually reserved for customers with excellent credit, so it's essential to polish that credit score before shopping.

Captive finance companies often offer rebates, also known as cash bonuses, to customers who meet their requirements.

They can be a great option for those who qualify, but it's crucial to understand the terms and conditions before making a decision.

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In 2021, the average used car loan term was over 67 months, according to the Experian State of the Automotive Finance Market report.

Those with poor credit tend to have shorter loan terms on their used car loans than those with good credit, but even they are seeing their loan terms increase. For subprime borrowers, the average used car loan term increased by nearly a month, while deep subprime borrowers saw loan terms increase by an average of close to two months.

The average used car loan term for different credit score tiers is as follows:

More than 70% of used car loan terms are 61 months or more, up slightly from 69.85% in Q2 2023.

When financing a car, it's essential to consider the total cost of ownership, not just the loan amount. In the US, the average annual maintenance cost for a car is around $1,200.

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Other costs to consider include insurance premiums, which can range from $1,000 to $2,000 per year, depending on the vehicle's value and your driving history. This can add up quickly, so it's crucial to factor it into your budget.

Additionally, you'll need to account for fuel costs, which can vary depending on the car's fuel efficiency and your driving habits. For example, if you drive an average of 15,000 miles per year in a car with a fuel economy of 25 miles per gallon, you can expect to spend around $1,000 per year on gas.

GAP insurance covers the difference between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged, or totaled.

You don't have to buy GAP insurance, but if you decide you want it, shop around because lenders may set varying prices for this product.

Force-placed insurance is a type of insurance that lenders can purchase for a vehicle if you fail to obtain insurance or let your insurance lapse. This usually happens when you're trying to buy a vehicle with a loan.

Lenders often have a contract clause that gives them the right to purchase force-placed insurance to cover the vehicle.

If you're not careful, you might end up paying for two sets of insurance: your own insurance policy and the force-placed insurance purchased by the lender.

Repair costs can add up quickly, especially if your loan term is longer than 60 months. You may be making car payments long after your warranty has expired.

Many new cars come with basic warranties that last three or four years. This means you'll be on your own for repairs after that period.

A car's repair costs tend to increase with age. The older your car gets, the more likely you are to face expensive repair bills.

Some automakers, like Kia, Mitsubishi, Hyundai, and Genesis, offer longer warranties - up to 10 years or 100,000 miles of powertrain coverage. This can provide added peace of mind, but it's not a guarantee against all repair costs.

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If you owe more on your current auto loan than the vehicle is worth, you have negative equity.

You're essentially stuck with a debt that's tied to a vehicle that's now worth less than what you owe on it.

For example, if you owe $10,000 on your auto loan and your vehicle is now worth $8,000, that means you have negative equity of $2,000.

Negative equity will need to be paid off if you want to trade in your vehicle and take out an auto loan to purchase a new vehicle.

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Refinancing can be a smart move if you're stuck with a car loan that's not working for you. If your income or credit score improves, you can shop around for refinancing options to shorten the loan term, get a lower interest rate, or both.

You can consider refinancing to a four-year loan, which can save you money in the long run. For example, if you bought a $20,000 car with a six-year loan, you'd end up paying $25,651 in total.

Refinancing with a lower interest rate can also make a big difference. In the example, refinancing from a 7.02% APR to a lower rate could save you hundreds of dollars in interest payments.

Here are some options to consider for refinancing:

Ultimately, refinancing can help you save money and get a better deal on your car loan.

You can refinance a car loan if your income or credit score improves. This is a great way to shorten the loan term, get a lower interest rate, or both.

If you're stuck with a high-interest loan, refinancing can help you save money in the long run. Your local bank or credit union are good options to consider.

Your credit score and payment history will determine how good a deal you get, no matter who you go with.

Comparison is key when it comes to car loans. Let's say you're looking to buy a new car for about $20,000 and want to pay less than $300 a month.

A six-year loan can turn that $20,000 car into a $25,500 car. This is because the total payment includes the loan amount plus taxes, title, fees, and interest.

The monthly payment for a four-year loan is more than $100 a month higher than a six-year loan. This makes it difficult to afford.

A four-year loan on a $15,000 car has a monthly payment of $287, which is less than $300. This is a more affordable option.

The total payment for a four-year loan on a $15,000 car is $18,497. This is $2,000 less than the total payment for a four-year loan on a $20,000 car.

Here are the total auto loan costs for different loan terms:

When buying a car, you have two main options: new or used. A new car typically comes with a manufacturer's warranty, which can provide peace of mind and financial protection.

New cars also tend to depreciate quickly, losing up to 20% of their value within the first year of ownership. This can be a significant concern for some buyers.

Some people prefer the lower upfront cost of a used car, which can be 20-30% cheaper than a new car. However, used cars may not come with a manufacturer's warranty, leaving the buyer to cover any necessary repairs.

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New cars often come with longer loan terms, and the average term has been increasing. In the second quarter of 2024, it rose to 68.48 months, a slight increase from 68.29 months in the same period the previous year.

Most new car loans have terms of 61 months or more, with 69.62% of loans falling into this category. This is a small increase from 69.54% in Q2 2023.

The average loan term varies depending on credit score, with super prime borrowers seeing the smallest increase. Super prime borrowers have an average loan term of 64.04 months, a 1.04% increase from Q2 2023.

Here's a breakdown of the average loan terms by credit score tier:

The percentage of new car loans with terms of 73 months or more actually decreased by 7.23%, from 31.09% in 2023 to 28.84% in 2024.

Used cars have become a more attractive option for many buyers, and it's not just about the price. The average used car loan term has remained relatively steady, with some notable exceptions.

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For subprime borrowers, the average loan term increased by almost a month, while deep subprime borrowers saw their loan terms increase by nearly two months. This suggests that lenders are taking on more risk with these types of borrowers.

Here's a breakdown of average used car loan terms by credit score tier:

More than 70% of used car loan terms are 61 months or more, which is a significant increase from 69.85% in Q2 2023. This trend suggests that buyers are opting for longer loan terms to make their monthly payments more manageable.

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