What Is The Best Length For A Car Loan?

If you’re considering a car loan, then one of the main questions you’ll be asking yourself is how long should I take that loan on for?

There are numerous loan options, spanning between 1 to 10 years in length—it’s generally considered a car loan’s optimal length, on average, is 48 months. 

But why 48 months? 

Well, it’s mainly due to the fact that your average interest rate on a loan of this length will be much lower than in comparison to longer termed loans. Another key reason is that with a shorter loan term such as 48 months, you’re less likely to enter into negative equity on your cars and will be able to trade in your used car for your next car. 

48 months might not align with your financial goals, however, and opting for a longer-term loan might be what you need to do in order to score a good deal.

Honestly, that depends on you and your monthly budget. You should be choosing a loan term that allows you to best afford your ongoing repayments and not put you under any financial stress. Not sure what that looks like for you? Why not try our free car loan calculator?

If possible, get short-term loans that range between 12 and 48 months. Of course, if this is not feasible, take the options you can get but understand the commitment that comes with it.

Most common car loan terms

The most common car loan term is 72 months. The option for an 84-month loan isn’t far behind the 72-month option and will enable those needing to reduce their monthly repayments to secure a car loan.  

48-Month Car Loan

A 48-month car loan is probably one of the best options when it comes to interest rates because they’re usually lower. If you’re someone who’s able to afford larger monthly payments, then this should be the type of loan you take out.

72-Month Car Loan

A 72-month loan, as previously mentioned, is the most common type of car loan taken out by people not just in Australia but around the world. The reason is due to the lower monthly payments in comparison to short-term loans. Of course, the downside is that over the life of the loan, you will pay more in interest.

84 Month Car Loan

84-month car loans are the second most sought-after car loans in Australia and around the world. These loans offer minimal monthly payments but higher interest. Similar to the 72-month loan, people unable to afford larger monthly payments will likely have no choice but to explore 72/84-month car loan options.

Meet Scott. He has his eyes on a 2018 SUV model valued at $25,000. He has $5,000 as a down payment and an excellent credit score rating. We used our free car finance calculator to see what Scott’s monthly payments would look like if he was to go with a 36, 60, or 84-month loan term. 

Scott’s monthly payment breakdown

Car Loan Terms & Monthly Repayment

36 months - $674

60 months - $437

84 months - $348

​​Is it better for Scott to pay off his car loan early?

As you can see, Scott’s monthly payment was higher on a shorter loan term than on a longer, 84-month term. If he is able to pay off his car loan earlier, it is advised for him to do so as he would save on the total cost of his loan by reducing the amount of interest he’s paying over time.

There are various factors that can change the make-up of your car loan as discussed below.

Interest rates 

Interest rates aren’t just determined based on loan length, they can be influenced by a variety of factors. Your credit score is a big factor in determining the interest rates you’ll be offered. A credit score is a history of your interactions with credit and determines how creditworthy you are as a borrower. Some of the other factors include debt-to-income ratio, loan length and size of the downpayment. 

How do I lower my interest rates?

There are three effective ways to improve your standing to lower your interest rates:

• Pump the brakes on the purchase and rehabilitate your credit history.

This obviously means postponing the purchase of your vehicle. However, this might be the best move you could make. By reducing other debts and making payments on time, you’re allowing yourself to be fully prepared for this commitment. 

• Don’t stick with the first car you see. See what is out there and what financing options there are!

Car loans are available from a large number of lenders. So you’ve got options, and they are competing for your attention—see who has the best deal to offer! Driva allows you to do this seamlessly comparing 30+ Aussie lenders in a matter of minutes to generate your personalised rates. 

• Look at refinancing down the line.

If you need the car now and can get approved even with a less than stellar credit score, the option to refinance when your credit score improves is always a possibility. By refinancing with a better credit score, you’re potentially able to get a lower interest rate on your car loan.

Length of loan

We’ve mentioned this several times already, but it bears repeating. One of the most significant determinants of what affects a car loan is the length of the loan itself. The longer the loan, the higher the interest, but the lower the monthly payments. Obviously, this means shorter loans result in higher monthly payments but less interest paid over the life of the loan. 

New car loan vs old car loan

Risk associated with the vehicle you’re planning on buying will factor into the interest rate and the ability to even get a car loan. Older vehicles don’t hold much resale value, so if your car gets repossessed, it will not be able to get what the loans are worth or even close in some cases. That’s why you’ll be charged higher interest on an older car rather than a new model. 

Size of down payment

When you’re planning on purchasing a car through external financing options, you need to put a down payment on the car. There’s often a minimum requirement, but anything beyond that is optional. The more you reduce the loan amount, the more you reduce the burden you place on the loan. This will likely score you better loan terms with your lender.    

Debt-to-income ratio

When lenders consider lending money, they run various assessments on the borrower to ensure they can afford a loan. One such measure is a DTI or Debt-to-income ratio. This measures overall debt in comparison to the income you receive over a certain period of time. When you’ve got a high debt-to-income ratio, regardless of if your salary is on the higher end of the spectrum, you end up with a smaller loan offer and less impressive interest rates. 

If you're still unsure if car finance is right for you, check out our comprehensive guide on 'Is It Worth Getting A Car Loan?'

There are two different options for loans: short-term and long-term. Let’s take a look at how they compare:

Disadvantages of long-term car loans

There are several disadvantages of purchasing a car using a long-term car loan. Some of these disadvantages include:

• The car doesn’t actually belong to you until you’ve fully repaid the loan to the lender. This puts the car forever at risk of repossession in the event of falling behind on payments.
• Long-term loans have higher interest rates. So while the monthly payment may be smaller than short-term loans, they end up having higher interests and are paid for far longer. 

Disadvantages of short-term car loans

Just because there are disadvantages to long-term loans doesn’t mean short-term loans come out unscathed. Here are some of the disadvantages of short-term car loans you should consider:

• Monthly payments on short term loans are considerably higher than that of long-term loans. The point of a short-term loan is to repay it as soon as possible, which means larger commitments. If you’re unable to meet these commitments, you risk falling behind and the car being repossessed as a result.

Trying to find the best car loan length for you ultimately boils down to you and your financial situation. If you’re able to afford a short-term car loan, then seize the opportunity! Driva’s got great offers on hand for borrowers seeking the shortest possible loans to get the cars of their dreams! Check out our car loan calculator and detailed comparison of dozens of the best car financing options in Australia on our website.

Is it smart to do a 72-month car loan?

Although a 6 year loan term will help reduce monthly payments to a very affordable amount initially, they may not be the best option. As these long-term loans take longer to pay back, the total interest you pay on the loan is much greater. When this is coupled with other factors, such as car depreciation, and loans going ‘upside down’—when you owe the lender more than what your car is worth—choosing a 72-month loan will likely cost you more money in the long run.

What is the longest car loan you can get?

Typically the longest car loan you can get is between 8 and 10 years. As mentioned previously, a longer loan term will result in smaller monthly payments but the interest over the life of the loan to be paid will be massive.  

What are the shortest car loans you can get?

Generally, shorter term car loans do not come below 24 months. If you’d like to pay off your loan in a shorter time period however, then there is nothing stopping you from doing that, and in some instances, it may actually be encouraged as you’ll reduce the interest paid on your car purchase and will likely improve your credit score. 

What is the average car loan rate?

There is no set in stone rate, but interest rates in Australia are usually between 3 and 10% for secured car loans and can range as high as 15% for unsecured car loans. An interest rate on a car loan will typically be lower than on personal loans as the loan collateral is usually the car you are planning on purchasing. 

Is it better to get an auto loan from your bank or the dealership?

When dealing with financial decisions such as entering into a loan, speaking with experts for the best advice should be your first move. As a rule of thumb, banks offer better and more secure/reputable loans with lower interest rates,