Loan Term
A loan term refers to the agreed-upon period over which a borrower must repay an auto loan, commonly measured in months such as 36, 48, 60, or 72 months. The loan term directly affects both the monthly payment and the total cost of the vehicle.
Shorter terms generally result in higher monthly payments but lower total interest paid over the life of the loan. Longer terms reduce the monthly payment, making vehicles more affordable in the short run, but usually lead to paying more in total interest.
The choice of loan term is influenced by a buyer’s budget, creditworthiness, and the lender’s offerings. Lenders may incentivize shorter terms with lower interest rates to encourage faster repayment, while longer terms appeal to buyers seeking lower monthly obligations.
Understanding loan terms is crucial because while a longer term may make a car seem more affordable month-to-month, it can also lead to negative equity - owing more than the car is worth - as vehicles depreciate faster than loan balances decline. Choosing the right loan term involves balancing affordability, interest costs, and long-term financial stability.
Example
Maria buys a car for $25,000 with a 60-month loan term. Her monthly payment is $450, but if she had chosen a 36-month term, her payments would be $700 with less total interest paid. The longer loan term makes her monthly budget easier, but she pays more overall.