Ask the Expert: How long should my auto loan be?

Tom Barkley is Vice President and Enterprise Solutions Manager at TruStone Financial. He is responsible for providing solutions and advice that increases the credit union’s efficiency and improves member experience. Below, he shares his advice on choosing the right term length for your auto loan—knowledge that he gained over years of working in lending.

When choosing an auto loan, it is obviously important to secure a good rate. But it can be just as important to choose the right term length for your auto loan—meaning choosing how many years (expressed in months) you will be paying the loan off. Common wisdom says to avoid terms longer than 60 months so that you can pay the car off faster and pay less in the long run. While it is true for many people that a shorter term is better, there are cases when a longer term may work to one’s benefit. The term length you choose ultimately comes down to your unique needs, financial situation and priorities.

Here are some questions to ask yourself when deciding on the length of your auto loan:

What can I afford? 

This is the most important question to ask yourself. You need to look for a loan that will have payments you will be comfortable with. But that means deciding what is truly important to you right now.

If you are buying a car, you need to ask yourself, “What do I need in a car?” Maybe dependability and safety are your top priorities, or if you’re a big commuter, fuel economy may be a deal breaker. Perhaps you’re ready to splurge on a higher-end vehicle with luxury features because you know you have your major financial bases covered. Make a list of the features you need and want (and be honest when deciding which is which), then do plenty of research on which cars will fit the bill before you start shopping.

How long do I expect this car to last? 

One of the most important things to consider when deciding the term length of the loan is how long the car will last. Everyone wants their car to last for ten years, but with many cars, that may not be a reality. It pays to be a little more conservative when estimating the lifespan of a car. If you’re buying an older car, it may be best to take a shorter term so you aren’t left paying off a car until—or even after—it dies.

What is the rate difference between the shorter and longer term? 

Usually, lenders charge higher rates on loans with longer terms. With a longer term, a person can always pay off the loan ahead of schedule. (Just check your contract for prepayment penalties—some lenders will make you pay a fee for paying the loan off early.) However, if the longer term rate is quite a bit higher, the shorter term may be the best bet.

What are the second-order benefits of your term length? 

The primary benefit of a longer term length is, of course, a lower monthly payment, whereas the benefit of a shorter term length is paying less for the car in the long run. Based on what was already discussed, the obvious choice would be the shorter term, right? Maybe. But you should also consider the second-order benefits of a longer term. Here are a few:

  • Putting your savings towards higher-rate debt. If getting a longer term means you have extra money available every month to pay down a high-rate credit card balance, then that may be the best option. By directing additional dollars to your higher-rate debt, you could save quite a bit in overall interest paid and come out ahead in the long run.
  • Setting up an emergency fund. You can use the money you save with a longer term to make sure you have a rainy day fund. Most Americans don’t have enough savings to handle a $1,000 emergency. Saving $50-100 per month can quickly help build up that emergency fund. Having a shorter term will give you more equity in your car, sure. But if you need to bring it to a mechanic, they accept money, not equity.
  • Having more money for other life goals. Do you want to travel more? Maybe not today, but in a post-COVID world? Or maybe you have other life goals that aren’t free to pursue. Having some extra cash every year can let you go on a trip you may not have been able to take if you were paying more for a shorter-term auto loan. At first glance, a choice like this may seem frivolous, but financial health is just one part of your overall health. While it is unwise to spend beyond your limit, it can also be unwise to pinch too many pennies. If there is some cushion in your finances, it may be worthwhile to use that surplus to enrich your life in other ways. 

If you have a solid emergency savings, little or no high-interest debt and some extra room in your budget, a shorter term may be right for you. If there are other areas of your finances that you need to focus on first, a longer term may fit better.

No matter what term you currently have or need, now is a great time to consider refinancing. For a limited time, you can get a great low rate on an auto loan from TruStone.