Understanding Car Loan Terms: Trends and Tips for Borrowers

The average duration of car loans is steadily increasing, with current terms ranging from five to six years for new and used vehicles, according to Experian's State of the Automotive Finance Market report. Typical auto loan terms vary between 36 and 84 months, with some options extending from as short as 24 months to as long as 96 months.

For new vehicles, the average term was 68.94 months in 2025, while used car loans averaged 67.68 months. Longer loan terms generally lead to lower monthly payments, but they also result in higher overall interest costs. Erin Keating, executive analyst at Cox Automotive, highlights that while a longer term can decrease monthly payments, it often increases the total interest paid over time.

Deciding on the right loan term involves balancing immediate financial relief against future costs. Keating advises considering how long you plan to keep the vehicle and your need for budget flexibility. Factors such as down payment, trade-in value, and the new vehicle's price will influence borrowing amounts. It's generally recommended to allocate no more than 15% to 20% of monthly income to car payments.

Preapproval for a car loan allows consumers to understand potential rates and terms, making offer comparison vital for obtaining favorable conditions. Negative equity, which occurs when more is owed than the car's value, poses a risk with longer loans due to slow principal reduction. Keating recommends shorter loans for those who can afford higher payments to minimize interest costs and reduce negative equity.

Loan terms are often influenced by the expected vehicle ownership duration. Shorter loans are practical for those anticipating frequent vehicle changes, while longer terms may suit buyers looking to manage monthly payments over an extended period. Keating advises focusing on total cost rather than just the monthly payment to avoid financial strain.

While some experts suggest a maximum term of 60 months for long-term financial health, this may not suit every borrower. Lender limits often extend between 84 and 96 months. Experian data reveals an average new car loan rate of 6.73%, influenced by various factors including credit scores. Although there isn’t a strict minimum credit score for car financing, higher scores generally qualify for better terms, and prepayment penalties are uncommon. However, loan applications may temporarily affect credit scores due to hard inquiries.