The average length of a car loan varies with the economy. The tougher the economy, the shorter the length of the average car loan. Shortening loan lengths is one way that banks insulate themselves from risk. Currently, the average new car and used car loans are about the same, lasting a little more than five years (60 months). Overall, average lengths have been increasing in recent years, and today’s 65-month average for new cars is one of the longest on record.
How Long Should You Finance?
Many people weigh the length of a car loan based on the monthly payment. There are other issues to be considered, though. One such issue is the value of the vehicle compared to the total amount financed, including total interest to be paid. This is know as loan-to-value ratio, or LTV. If that ratio is too high, you may be required to carry gap insurance. The additional insurance requirements may equal the payment on a shorter loan, making shorter loan terms more attractive.
Another issue is the amount of interest that has to be paid over the life of a five year loan. You can save hundreds of dollars by shortening that loan by a single year and the monthly payments may only be $50 more.
You can avoid both issues by shortening the length of your loan and offering a higher down payment. Which ever strategy you use, you will save money over the long haul.