How to choose the right term for your car loan

If you are in the market for a car loan, aside from interest rate, one of the key factors to consider is the car loan term - but how do you choose the right term length?

Choosing the right term for your car loan is an important decision to factor in, given the length of the loan bears significant influence on your repayments and how much interest you will be required to pay. As a rule of thumb, the shorter the loan term, the larger your frequent repayment amounts will be - however you will end up forking out less in interest expenses over the duration of the loan. Longer loan terms operate as a direct opposite, meaning you may pay less in repayment amounts over a longer period - however you will be required to pay more in interest over the length of the loan.

Most common car loan terms

In Australia, car loans are offered across a number of different terms, ranging from as little as one year to as long as ten years. Generally the most common car loan terms range from three to five years, however each individual circumstance is different. Here at loans.com.au, car loans are offered across terms ranging from three to seven years.

Choosing a car loan tailored to your needs

Before you opt for a specific loan term, consider your monthly budget and choose a term that allows you to make consistent repayments comfortably without impacting your broader financial position. If you can afford higher monthly payments, you can opt for a shorter term and save on interest. However if not, that’s okay! Depending on the structure of your car loan, you may be able to make additional repayments should you acquire some extra income. This can help you reduce the overall length of your car loan term.

It's important to consider that the value of cars decreases rapidly over time. Therefore, you should avoid a scenario where the value of your car declines to the point where the loan's worth exceeds that of the vehicle. To prevent this, select a loan term that enables you to pay off the loan before the car depreciates too much in value.

Future plans may also play into calculations when considering car loan terms. If you plan to pivot careers, buy a property or even start a family, you may consider opting for a longer car loan term to spread out the size of repayments over a greater time period.

Pros and cons of a short-term car loan

Pros

• Less accrued-interest: As mentioned above, a shorter loan term generally means you will pay less in interest over the life of the loan, as the interest will accrue for a shorter period of time.
• Potential for faster loan repayment: A shorter loan term means that there may be the potential for you to pay off the loan faster. This can mean owning the car outright sooner and saving money in the long run.
• Lower total loan cost: Since the borrower is paying off the loan faster, the total cost of the loan including interest and fees, will be lower than a longer-term loan.

Cons

• Higher payments: A shorter loan term typically means you will have higher repayments, which may not be affordable for everyone.
• Limited flexibility: Since repayments are higher, you may not have the flexibility to save for other goals or expenses.
• Potential for financial pressure: Higher monthly payments may put a strain on your budget and alter your ability to meet other financial obligations.

Pros and cons of a long-term car loan

Pros

• Lower monthly repayments: A longer loan term typically means that the borrower will have lower monthly payments, which may be more affordable for some.
• Greater financial flexibility: Lower monthly payments may provide the borrower with more financial flexibility to meet other financial obligations or save for other goals.
• Easier to qualify: A longer loan term may make it easier for some borrowers to qualify for a loan, as lenders may be more willing to lend money over a longer period.

Cons

• Greater amount of interest payable: A longer loan term means you will likely pay more in interest over the life of the loan, as interest will accrue over a longer timeframe.
• Higher total loan cost: By paying off the loan over a longer period, the total cost of the loan including interest and fees, will be higher than a shorter-term loan.
• Longer debt repayment: A longer loan term means you may be in debt for a longer period, potentially altering your ability to make other financial decisions.

To determine which car loan term may be best tailored to your financial position, check out our car loan calculator. If you are ready to push start on a car loan with a competitive interest rate and a number of loan term offerings, chat to one of our lending specialists today.

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