If you're like more than 80% of new car buyers, you plan to take out a car loan for your new vehicle. Or you might be in the category of used car purchasers, more than half of whom arrange for auto loans to complete their transactions. Either way, when you're equipped with financing information including average car loan length, interest rates, monthly payments, and the reasons for them, you're empowered to make wise decisions and a smart deal.
New and Used Car Average Monthly Payments
The average monthly payment for a new car reached $531 in August 2018, which was a record high amount as sales data from Edmunds showed. For used cars in the last quarter of 2018, the average monthly payment was $381. For leases, the average payment was $430 per month, according to Experian, one of the three major credit reporting agencies.
Payment amounts have steadily increased because the prices of new vehicles overall are continuing to rise, and drivers are increasingly shifting to larger vehicles after years of downsizing because of high fuel prices and a weak economy. To achieve lower monthly payments, more buyers are covering their purchases with auto loans that offer longer terms.
What is the Typical Car Loan Length?
More than a decade ago, U.S. auto loan terms were typically 36 months to 48 months, with a high of 60 months, which is five years. As automakers raised the prices of their vehicles, dealerships and lenders looked for ways to accommodate customer desires to own these more expensive vehicles without increasing down payment amounts. They reached a solution: longer loan terms.
By the third quarter of 2015, 43.5% of new-car buyers had loans of 61 to 72 months, according to Experian. The credit reporting agency noted that 27.5% of buyers had even longer terms for making monthly new car payments: 73 to 84 months. The typical car loan length has also grown longer for used car buyers, with 41.3% of consumers in this category choosing 61 to 72-month loans, notes Experian. There are 16.2% of used car purchasers who finance their vehicles for between 73 and 84 months.
That means nearly three-quarters of new car buyers take out loans of 61 months or more, and 57.5% of used car buyers have a car loan length of 61 months or more – both of which are beyond what was typical just 10 years ago. In 2018, the most common car loan length for new and used vehicles 72 months, followed by 84 months, according to Edmunds, which recommends a limit of 60-month auto loans.
Why Longer Loan Terms Matter
When you drive that new vehicle off the dealership lot, you love it and might even promise yourself you'll keep it for 10 years. But statistics show that as of the end of 2015, most Americans sell or trade their new cars within about 79 months or 6.5 years. For used car buyers, the figure is 66 months. So if you decide to sell your vehicle after owning it for 72 months or six years, but you have a longer-term loan, such as an 84-month loan, you still have another 12 months of car payments to finish. With a 72-month loan, you wouldn't get a break between making payments on your Ford and the new vehicle you buy. However, by taking a 60-month loan, you have a full 12 months without car payments. That difference in car buying cost could be money put toward your down payment on the new vehicle or another financial goal.
Long-Term Loans Prolong Negative Equity
When you buy a new car, it depreciates between 20% and 22% in the first 12 months, which means that on the front end of the loan, you owe more for the vehicle than it's worth. Negative equity is the financial term for this condition, which is commonly called being "underwater" or "upside down" in the loan. If you make a small or no down payment and combine it with a long-term loan, you sink deeper underwater, and it will take longer to recover any value left in the vehicle if you try to sell.
Interest Rates Affect Long-Term Car Buying Costs
Taking out a longer-term loan rather than a shorter loan also means you pay higher interest rates and more finance charges over the life of the loan. Perhaps you plan to finance your new vehicle for $31,070, the average new car loan amount in 2018, with a 72-month loan. Based on Edmunds' information, the average interest rate in 2018 would be about 6.9%, because the longer the loan, the higher the interest rate typically becomes. You would carry a monthly car payment of about $528, which costs you $6,962 in finance charges for the duration of the loan.
With a 60-month loan for the same average loan amount of $31,070, at the 2018 average interest rate of 3.2%, your monthly car payment would be $561 or $33 more per month. However, your total interest charge for your car purchase would be only $2,593 over the life of the loan. You save $4,369 over what you would pay for a 72-month new car loan, and you will finish paying for your car 12 months sooner.
How to Avoid the Typical Car Loan Length
You don't have to be bound by the average length of a typical car loan or interest rate, especially if you have good credit. Use an online auto loan calculator to determine a range of monthly payments you can afford and shop around for low loan rates. Credit unions are a good place to obtain loans for new and used vehicles. As nonprofit financial institutions, their loan rates tend to be lower than banks by 1% or more. To qualify for a new or used car loan you might have to become a member of the credit union, but many such as Alliant Credit Union and Navy Federal Credit Union have relaxed membership requirements. Even a 1% lower interest rate can save you thousands of dollars over a five-year or even longer period. Boost your credit score by paying off some consumer debts to reduce your debt-income ratio or generate short-term income to make a larger down payment before you buy your car to help lower your interest rate and keep your car loan term short.
Buying a new or used car should be a joyful experience, not a long-term financial burden. With the right strategy and information, you can beat the odds and not get stuck in the mud of a long-term loan of 72 or 84 months that has become the typical car loan length.