Short Term vs Long Term Car Loans

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Written by Nick Versaw

Updated May 27, 2022

In a perfect world, we would simply purchase our cars with cash and pay in full, but the vast majority of Americans will need to finance their vehicle purchase. 

Some will get a car loan for the typical 60 months, while others will choose 72 or even 84-month options to make their monthly payments more affordable. In fact, the average car loan term is increasing.  

According to the folks at Edmunds, 73 percent of auto loans in 2022 were for terms over 60 months.  At the moment, the most common auto loan term is 72 months. But the 84-month option isn’t too far behind in popularity. 

With car loan terms on the rise, it is important to understand the relative pros and cons of short-term and long-term car loans.

The Basics of Short-Term vs. Long-Term Car Loans

Recent research by Experian found that there’s $1.37 trillion in outstanding auto debt. That works out to an average auto loan balance of $19,865. 

On average, monthly car payments amount to $648. That’s an all-time high. But your exact monthly payment is impacted by several factors. The loan amount and interest rate will both affect your monthly payment

Another variable is the loan term. When all other variables are equal, a longer loan term leads to smaller monthly payments because you’re spreading your loan payments out over a longer period. But if you shorten the loan term, you’ll face a higher monthly payment since you’re paying off your loan quicker. 

It’s important to remember that ‘short’ is a relative term that changes based on your perception. You can find loan terms that range from 12 months to 96 months. With the new average loan length around 70 months, you might consider anything less than 70 months a short-term. But in reality, the 60-month term was conventionally considered a long-term loan just one decade ago. 

Pros and Cons of Short-Term Auto Loans

The most obvious benefit of a short-term loan is that you can pay it off quickly. But locking in a higher monthly payment could be an issue if you run into economic troubles. 

However, there are other factors to consider. Let’s explore the advantages and disadvantages of short-term car loans. 

Advantages of Short-Term Car Loans

Here’s why short term auto loans are attractive. 

• Pay it off faster: A short-term loan means this debt will be out of your life earlier. The ability to live without a car payment sounds like a fabulous reality for any budget. 
• Save money: When you opt for a shorter loan term, you won’t pay as much in interest for two reasons. One, lenders typically offer lower interest rates when you have a shorter loan term and two,  since you’ll pay off your loan quicker, it will incur interest over a shorter period.
• Build equity quickly: With a shorter loan term, you’ll own more equity in the vehicle quickly. Equity is essentially the value of your car minus how much you’ve paid toward the principal. With more equity, there’s less of a chance you’ll become “upside down” on your loan. When you’re upside down you owe more than the car is worth and no one wants that. 

Disadvantages of Short-Term Car Loans

As with all financial products, there are some disadvantages of short-term car loans. 

• Larger down payment potentially required: If you are taking out a short-term loan, the lender may require a relatively large down payment. Even if it’s not required, you may need to make a large down payment to access a monthly payment that fits your budget. 
• Higher monthly payments: The short loan length means that you’ll likely make larger loan payments. But this is avoidable if you make a big down payment. 
• Challenge to find: The average monthly auto loan term is 70 months. Typically, you can easily find loan terms of 60 or 72 months. But fewer lenders are offering shorter terms. 

Pros and Cons of Long-Term Auto Loans

When considering a long-term auto loan, the biggest draw is the ability to tap into lower monthly payments. But the terms often cost you more over the long term. 

Advantages of Long-Term Auto Loans

Here’s a look at the advantages that long-term auto loans bring to the table:

• Lower monthly payments: When you stretch out the loan amount, you can enjoy lower monthly payments. That’s good news for most budgets. 
• Lower down payments: Most lenders will accept smaller down payments for longer loan terms. 
• Expand your car budget: The longer loan term allows you to stretch out the repayment. With that, you can potentially afford a more expensive car. Although tempting, try not to spend more than you planned on a vehicle.
• Flexibility: Although you have a longer loan term, that doesn’t mean you can’t pay it off early. If there’s no prepayment penalty, you can choose to accelerate your payments when and if you can. 

Disadvantages of Long-Term Auto Loans

Now for the disadvantages that come with long-term auto loans:

• Stay in debt longer: A long loan term means that you’ll be stuck in debt for a long time. 
• Lower resale value: Depreciation will eat away at your vehicle for years. With that, you’ll walk away with a lower resale value when the loan is finally paid off. 
• Build equity slowly: It is much easier to become “upside down” when you’re paying on your loan for an extended period.  Early in your loan term, most of your payments will cover interest instead of the principal.  That being said, you will have very little equity in the vehicle for quite a while. It is possible to become upside down, as the car will likely depreciate at a faster rate than you are building equity.
• Pay more in interest: You’ll likely pay a higher interest rate. Plus, you’ll pay more in interest over the life of the loan. 
• Less flexibility on car insurance options: Most lenders impose some car insurance requirements beyond the state’s minimum requirements. A longer loan means you’ll be stuck with these requirements for longer. But it’s still possible to save money on your car insurance payments.

Alternatives to a Long-Term Auto Loan

Ultimately, a long-term auto loan is more expensive. Plus, it puts a drain on your finances for years to come. In most cases, it makes sense to seek the shortest term you can afford. But if that’s not an option, then consider these alternatives to get the wheels you need. 

Lease a Car

If you are struggling to secure attractive interest rates, then consider leasing a vehicle instead. This move gets you the wheels you need without being locked into a loan you can’t afford.  

Leasing a car? Check out the insurance requirements before signing on the dotted line. 

Find a Co-signer

A co-signer with a good credit score can help you secure better interest rates. Although it’s a big ask, many family members and friends are willing to take on this financial responsibility to help out. 

With the right co-signer, you might be able to shorten your loan term. That could mean thousands saved over the life of your loan. 

When a Short Term vs. Long Term Loan Makes Sense

The ideal auto loan varies based on your unique situation. But here is some food for thought:

When Short-Term Loans Can Make Sense

Short-term loans are generally better as you will pay less interest and have a lower risk of becoming upside down on your loan. It’s safe to say this option is better for your long-term finances. 

But if you can’t comfortably afford a shorter term loan, then it could do more harm than good. That’s because a single missed car payment can significantly impact your credit score. If you aren’t sure that you can afford a higher car payment, consider a longer loan term and save the difference. Use those savings to create an emergency fund, which will come in handy if you run into unexpected expenses that would otherwise derail your finances. 

When Long-Term Loans Can Make Sense

If you can’t afford the monthly payments associated with a 60-month loan term, then it’s possible you’re shopping outside of your price range. Simply extending the loan term will result in you paying much more for the car in the long run due to interest.

For some people, a longer loan term makes car ownership possible. Even with the higher interest rates, this will get you the wheels you need. If you’re going this route, it’s still in your best interest to stick with a more affordable vehicle that you might be able to make additional payments on over time. 

Bottom Line

In the end, it is important to know what you can afford. There are online payment calculators that can help you understand what cars are in your price range.  Once you have defined your purchasing limits, you will be able to get out there and shop with confidence.

As you map out your car payment, don’t forget to include insurance in your budget. Your state will require some form of insurance, which could amount to thousands of dollars per year. 

Nick Versaw Managing Editor

Nick Versaw leads Compare.com's editorial department, where he and his team specialize in creating educational content about insurance and other related topics. As an award-winning writer, Nick has seen his work published in countless renowned publications, such as the Washington Post, Los Angeles Times, and U.S. News & World Report. He graduated with Latin honors from Virginia Commonwealth University, where he earned his Bachelor's Degree in Digital Journalism.