How long should a car loan be?
Car loans go for two, four, six years and I can't figure out how long mine should be. What's your recommendation?
I recommend a car loan of up to five years. Some lenders offer car loans for up to 10 years, and many offer terms of six or seven years. But there are several good reasons to avoid extending your car loan beyond five years:
Car boredom: We eventually get tired of our cars and want to trade them in for something newer and shinier. People own new cars for an average of 6.5 years, and they own used cars for an average of 5.5 years.
Higher interest costs: When you look at the total cost of buying a car, the interest you pay is a function of the rate and the length of the loan. The longer the term, the more interest you pay.
Lower resale value: Many dealers now offer “certified pre-owned” (CPO) programs. Essentially, they look for and sell newer trade-ins that haven’t been driven hundreds of thousands of miles. These cars, which are up to five years old, undergo inspections and have standard warranty protections from the manufacturer. Because of the CPO consideration, you would get more resale value from trading in a car at five years than holding onto it for six years or more.
The only reason to extend the term of a car loan is to make the monthly payment more affordable. Another way to lower the monthly payment is to make a large down payment on the car. You’ll reduce the amount you need to borrow, and thus the monthly payment should come down, too. In addition, a larger down payment can qualify you for a lower interest rate.
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