How Long Should My Car Loan Be?
Choosing a longer loan term will reduce your repayments, but is it worthwhile?
If you're stretching to buy a car that's just beyond your means, a dealer may offer you finance over a longer loan term. They'll focus on the weekly repayment, without mentioning the fact that this longer loan term will end up costing you a lot more over the life of the loan.
However, there are cases where a longer loan term will allow you the breathing space you need financially, while getting you into the right car.
How to choose the best loan term
When researching car loans, you need to start by identifying how much surplus income you have to put towards your new car.
Then you need to consider not just how much your payment will be, but the number of total payments that you'll make over the life of the loan.
Here you can see how the loan term will affect the size of your monthly car loan payment for a $30,000 car.
|Loan Term (months)||Monthly Repayment|
Calculate the possible car loan payments for different loan terms based on the exact purchase price of the car you'd like to purchase.
A longer loan term reduces your monthly repayment amount, which makes it less likely that you'll default on your car loan by missing a payment you can't afford.
In Australia, the proportion of car loan defaults has remained stable since 2012, fluctuating between 0.4% and 0.6%, according to Fitch Ratings agency's Fitch 'Dinkum' Automotive Asset-Backed Securities Index. This could in part be attributed to the increased popularity of five to seven year loan terms.
Loan size and loan term
According to research by Stratton Finance in 2017, the average car loan size in Australia was $39,445, with a median loan size of $31,003 and the most popular loan size $20,000. On average, women borrow around $5,000 less than men, due to a tendency to purchase smaller, more economical cars.
Reducing the loan amount allows you to reduce the loan term for your loan. If you're able to provide a larger deposit or trade-in towards your car purchase, you'll be able to take out a loan over a shorter term, paying less total interest.
What is the best loan term?
Australian Automobile Association (AAA) Transport Affordability Index estimates that the hypothetical average Australian household spends on average $122 per week or $529 per month on car loan repayments. Assuming that the average Australian family also takes out the median car loan, this tends to indicate that most Australians are taking out a car loan over 5-7 years.
While taking out a longer loan term can allow you to buy a newer or better car, you need to consider the impact of ongoing repayments on your other financial goals.
Why 48 months is an ideal loan term
Taking out a 48 month or 4-year car loan brings your car loan within the warranty period of most new cars. This means that you'll get a better resale price on your car. It also means you're free to upgrade your car sooner, allowing for lifestyle changes that affect your transport needs.
Taking out a longer loan term might be okay if you plan to keep the car for a long time. It's hard to plan ahead more than a few years though, so taking out a shorter loan term to purchase a less expensive car gives you flexibility for the future.
Remember the other costs of car ownership
Car prices haven't risen much in Australia since 1995, but the purchase price of the car isn't the only cost involved.
The AAA's Transport Affordability Index reveals that Australian households are spending up to $22,000 each year just to keep their cars on the road, as road tolls, fuel prices, insurance and other costs rise.
|A loan term of 84 months makes sense for Jeremy|
|Jeremy has just turned 50, and his children have left home. He and his wife intend to trade in their runabout Barina for a 4WD that can tow a caravan. They intend to keep this new car and caravan for at least the next 10 years, and Jeremy has carefully researched their options. He's intending to purchase a caravan and a Nissan Patrol using the one car loan.
The caravan will double as a granny flat for when their children visit. Taking out an 84-month loan term gives Jeremy the flexibility to continue to pay extra into his super while he's still working, and the payments are affordable should he decide to retire within the next seven years.
|Claudia buys a car over 60 months|
|Claudia decides to buy a new car through salary sacrifice. She loves her current job and intends to aim for a promotion in another two years, so she's pretty sure she'll stay with the company for around five more years or longer.
A young professional, Claudia decides to purchase a car that fits her personal brand, choosing a VW Polo GTI, her first ever brand new car. The five-year loan term means her repayments are affordable and allow her to continue saving a first home deposit.
|James chooses a short 36-month secured car loan|
|James has just moved to Sydney from Newcastle for work. He's renting and needs an economical car to get to work. He decides on a new Toyota Corolla, as he knows this car will hold its value, and he can easily upgrade when things change.
James takes out a 36-month loan to pay off the car sooner, hoping that he'll be able to drive the car for a couple more years after the loan ends to enjoy repayment free car ownership.
If you're thinking about buying a car, but not sure what loan term you should choose, get in touch with a lending specialist for some advice on the car loan options you can choose between. If you're not sure exactly what car you want to purchase, you can even get your car found for you using our vehicle sourcing service.