This lesson is general education about U.S. personal finance, not financial, tax or investment advice. Tax rules and limits change every year; check IRS.gov or a qualified professional for your situation.
What you’ll learn
- On a $20,000 loan at a 4.75% rate, paying off in 36 months costs $1,498 in interest; the same loan over 72 months costs $3,024, more than twice as much.
- Early payments go mostly to interest, so long loans keep balances high: after three years, a six-year loan at 5% had a balance more than $2,000 higher than a five-year loan.
- CFPB data shows six-year loans finance larger amounts, go to borrowers with lower average credit scores, and default at about twice the rate of five-year loans.
- Some financial experts recommend keeping an auto loan to five years or less, since longer terms more often leave the balance above the car’s value.
- Get the out-the-door price in writing and compare APRs and total of payments, not monthly payments, before you sign.
A car loan’s term is one of the few parts of the deal you set directly, and it changes far more than the monthly payment. Stretching the same loan over more months makes each payment smaller, but it increases the total interest you pay and makes it likelier that your balance outlasts the car’s value partway through the term. The questions below walk through the numbers so you can pick a term on purpose.
What Does a Loan Term Actually Mean?
The term is how long you agree to keep repaying the loan, usually written in months: 36, 48, 60, 72, or 84 in many conventional examples. Which of those you are offered depends on the lender, the vehicle, the amount financed, and your credit profile.
Auto loans are amortizing loans. Each fixed payment splits between the principal, which is the amount you borrowed, and the finance charge, which is the interest. Early in the loan, a larger share of each payment goes toward interest; toward the end, more goes toward principal. That is why the balance falls slowly at first and faster near the end of the term.
You can borrow two ways: direct lending, where you borrow the money yourself from a lender such as a bank, a credit union, or a finance company before you visit the dealer, or financing arranged through the dealership. Getting pre-approved before you shop gives you a benchmark for judging the dealer’s offer. Our article on mistakes to avoid when buying your first car covers the rest of the shopping process.
How Much Does the Term Change the Cost of the Same Loan?
The Consumer Financial Protection Bureau, the CFPB, uses this worked example: a $20,000 loan at a 4.75% interest rate. Paid off in three years, it costs $1,498 in interest. Stretched to six years, the interest total reaches $3,024, more than twice as much.
| Loan term | Total interest |
|---|---|
| 36 months | $1,498 |
| 72 months | $3,024 |
The trade shows up in the payment too. The six-year loan cuts the monthly amount by close to half, and the price of that monthly slack is about $1,526 more in interest by the last payment. Neither choice is wrong on its own, but the longer term is effectively a purchase of breathing room, and the cost is that extra $1,526.
Try it
When an offer is pitched on the monthly payment alone, ask what the same loan costs over a shorter term. The difference in total interest is the real price of the smaller payment.
Why Do Longer Loans Leave You Upside Down?
Owing more on the loan than the car would sell for is called negative equity, and long terms make it more likely. Amortization pays the principal down slowly at the start, so a six-year loan keeps your balance high exactly while the car is aging. The CFPB has found that with longer terms, the loan balance more often ends up above what the vehicle is worth.
A comparison the CFPB ran shows how the balances diverge. Take $20,000 financed at 5%. After three years of payments on a five-year loan, you would have paid $2,190.27 in interest and owe a remaining balance of $8,602.98. On a six-year loan at the same rate, you would have paid about $152 more in interest over those same three years and still owe $10,747, which is more than $2,000 higher.
Negative equity matters most when the car leaves your hands early. If you trade it in while you still owe money, the shortfall does not disappear. Rolled into a trade-in, negative equity can enlarge the new loan, stretch out how long you will be paying it, or push up the monthly payment. The CFPB has also warned that long loans can leave consumers owing money even after they are no longer driving the car.
Do Longer Loans Cost More Than Interest Alone?
They often do. The FTC notes that lower monthly payments frequently come with longer terms and higher interest rates, so the rate quoted on a 72-month loan can be worse than the rate on a shorter one.
Borrowing behavior compounds this. In CFPB data, the average six-year loan financed $25,300, compared with $20,100 for five-year loans and $32,200 for loans of seven years or more. Borrowers taking six-year terms had notably lower credit scores than five-year borrowers, averaging 674, which is 39 points lower. Default rates run about twice as high on the longer loans: more than 8% for six-year loans versus roughly 4% for five-year loans. If your credit history is still thin, our article on whether paying rent builds credit explains what actually counts toward your file.
How Common Are Six-Year and Longer Car Loans?
Common enough to be the norm now. In 2009, 26% of auto loans carried payback terms of six years or more; in the year covered by the CFPB report, that share had reached 42%. The growth came largely at the expense of five-year loans.
The stakes are large because car loans are large. Auto loans are the third largest category of American household debt, behind mortgages and student loans, with almost 100 million loans outstanding totaling more than $1 trillion. Financing is ordinary too: consumers finance 86% of new vehicle purchases and 53% of used ones, and for people who never buy a home, a car loan may be the largest debt they ever repay.
What Term Length Makes Sense?
Some financial experts recommend keeping an auto loan to five years or less, because with longer terms the balance more often ends up above the vehicle’s value. Some consumer commentators go further. Money expert Clark Howard has suggested 42 months as the longest loan worth taking, on the theory that if you cannot afford the payment on a short loan, the car itself is too expensive.
The practical fixes when a shorter term does not fit are straightforward: buy a less expensive car, put more money down, or wait and save longer. A down payment shrinks how much you have to borrow, which brings down your total financing cost. Setting up a habit of paying yourself first makes the saving part automatic.
What Else Should the Payment Fit Beside?
The loan payment is one line in the cost of keeping a car on the road. The CFPB points to taxes and insurance, which can run higher for a new vehicle than an older one, plus annual registration fees, maintenance, gas, and repairs. A payment that fits but leaves nothing for tires is a problem postponed, not solved.
Insurance deserves a quote before you commit to a specific car, since premiums vary from model to model. Our first car insurance quote checklist lists what to gather so the quotes you compare are accurate.
What Should You Check Before You Sign?
Start before the dealership. Review your credit report, which shapes both whether lenders will approve you and the interest rate they will charge. You can get a free copy by calling 1-877-322-8228 or through the official free annual credit report website.
Get the out-the-door price of the car in writing, including taxes and fees, before you talk financing with any dealer. That written total helps you compare offers on equal terms and catch add-ons that appear only at the desk.
Under the federal Truth in Lending Act, lenders must disclose key terms before you are legally obligated on the loan: the annual percentage rate, the finance charge, the amount financed, the total of payments, the number of payments, and the payment amount. Compare APRs to APRs, since the APR includes fees that the bare interest rate leaves out, and use the total of payments figure to see what a term really costs. The CFPB also offers an auto loan worksheet for adding up what you can afford.
Finally, if you plan to trade in a car you still owe on, ask how any negative equity will change the new loan before you agree to anything. That one question can keep a long loan from turning into an even longer one.
Common questions
Is a 72-month car loan ever a good idea?
It lowers the monthly payment, but on the same amount and rate it can roughly double the total interest compared with a three-year loan, and it makes it likelier that your balance outlasts the car’s value. If the payment is the problem, a cheaper car or a larger down payment usually costs less over time.
Do longer car loans come with higher interest rates?
They can. The FTC notes that lower monthly payments often require longer terms and higher interest rates, which is one reason to compare the APR on every offer instead of the payment alone.
What happens if I trade in a car I still owe money on?
If you owe more than the car would sell for, that is negative equity, and it can be rolled into your next financing. That can enlarge the loan, stretch out its length, or raise your monthly payment.
What loan length do experts recommend?
Some financial experts recommend five years or less, and some commentators, such as money expert Clark Howard, suggest going as short as 42 months. The shorter a term you can afford, the less the loan costs overall.