What is the Right Used Car Loan Term Length?

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By

Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


, Contributing Writer - August 20, 2018

The length of your car loan, also known as the loan term, spells out how many monthly payments you have, influences the amount of your payments, and also determines how much you end up paying in interest charges. Choosing your loan term is important, so make sure you do some research and budgeting to find the ideal length for you.

The Average Used Car Loan Term

Car loan terms have been getting longer and reaching all-time highs for several years now. Experts believe consumers are extending loan terms as a way to combat rising new car prices and, more recently, increasing interest rates.

Here's a look at the average auto loan term for used car buyers across different credit score ranges according to Experian's first quarter of 2018 State of the Automotive Finance Market report:

Deep Subprime (300-500 credit score) Subprime (501-600) Nonprime (601-660) Prime (661-780) Super Prime (781-850) Average (300-850)
Used Car Loan Terms 58.28 months 61.58 months 65.20 months 65.97 months 62.26 months 64.23 months

Choosing Your Ideal Loan Term

The longer the length of your auto loan, the lower the monthly payment, but the higher your interest charges (and overall cost). On the other hand, the shorter your loan term, the higher your monthly payment and the lower your interest charges are.

Let's look at an example to see this in action. Let's say you're financing a used car and your loan amount is $13,000 and your interest rate is seven percent. Take a look at the difference between a 48-month (four years) and 72-month (six years) loan:

Loan Term Monthly Payment Interest Paid Total Cost
48-month loan $311.30 $1,942.47 $14,942.47
72-month loan $221.64 $2,957.82 $15,957.82

Choosing a loan term is a balancing act. You have to find the right balance between what you can afford each month and what you want to spend in total. While the lower monthly payment associated with longer-term loans is nice, increasing your total cost by extending your term further than you need to isn't the smart financial thing to do.

What if I Have Bad Credit?

Car buyers tend to focus too much on their monthly payment when financing a vehicle. This tunnel vision can be an issue for borrowers with bad credit who receive higher than average interest rates. Extending a loan term is much more costly for these car buyers as a result.

If you need a bad credit car loan, our advice would be to choose the shortest term that you can comfortably afford. Here are some tips to help you accomplish this:

  • Have a Budget – If you don’t already have one, you should be keeping track of your spending with a budget. Whether on the computer or with pen and paper, write down all of your expenses every month and compare the total of all of them to your monthly income. What you have left over is the disposable income you can put toward a car payment.
  • Choose an Affordable Vehicle – You want to make sure you finance a car that comfortably fits into your budget. For many borrowers with bad credit, this means buying a used vehicle. According to Experian, 83.52 percent of consumers with subprime credit chose a used vehicle when financing during the first quarter of 2018. A good tip personal finance experts like to use is the 20 percent rule: use no more than 20 percent of your monthly income on car-related expenses, including the payment, insurance, fuel, maintenance, and repairs.
  • Have a Down Payment – A down payment reduces the amount you need to finance, which naturally leads to lower monthly payments and a lower total cost. With a big enough down payment, you may also be able to further reduce your loan term and still get a monthly payment you can afford.

The Bottom Line

The right car loan term length for you depends on your credit situation and budget, so make sure you do some research ahead of time to figure out the right balance. Just remember to keep the total cost of financing in mind alongside the monthly payment.

If you've crunched the numbers and know what's right for you, CarsDirect wants to help you find financing even if you're dealing with poor credit. We work with dealerships all across the US that know how to work through unique credit situations. We can connect you with one near you if you start by filling out our free auto loan request form online.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.


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