How Long is the Average Car Loan?

How Long is the Average Car Loan Now?

Higher payments, higher interest rates, and higher costs of vehicles have all conspired to increase how many Americans are entering long car loan term lengths. According to the same Experian report, the average new car loan now runs almost 70 months, while used cars are just over 68 months.

Previously, few lenders — banks, credit unions, or an automaker's captive finance company like BMW Financial Services — offered loans longer than 72 months for an auto loan term. At the same time, many customers went with 48 or 60-month loans for the lower interest rates and expected to keep their vehicle for two to three years after paying one off to save some money for a sizable down payment on a new one later.

Because of higher payments and interest, lenders have made 84-month loans and even 96-month ones more common, knowing that could be the only way to sign new loans and move vehicle inventory when consumers face higher monthly costs across the board. That's one reason the average age of a car on US roads is also at a record-high 12.2 years old.

However, while a 7 or 8-year loan might save you money every month, the vehicle will cost significantly more in the long run because of the interest paid monthly. On top of that, most new cars will be long out of warranty and endured the majority of depreciation by the end of the loan period, so it's important to factor in projected maintenance and wear and tear. There's a high possibility the vehicle will eclipse 100,000 miles and two or more sets of tires in that time.

Even if you haven't been shopping for a car lately, it's hard to ignore that prices on almost everything have risen rapidly. Eggs, milk, homes, and vehicles have become more expensive because of everything from shortages to inflation. And inflation has also brought higher interest rates and more expensive auto loans.

Unless you're the rare customer with a stack of cash in the bank for a used or new car, you'll probably apply for auto financing. Unfortunately, a car loan means you'll make loan payments for many months. And these factors are affecting the average car loan length right now.

What Does a Car Payment Cost These Days?

Because of lower incentives and higher interest rates, Americans are financing car purchases over more extended periods — as long as seven years, up from the typical four or five. And that can lead to consumers being upside down on the car, having negative equity on the vehicle, or enduring high interest rates over the life of the loan.

By the end of 2022, the average American spent $716 per month on a new car payment and $596 for a used car, according to Experian. That's up from $575 and $430, respectively, in 2021 and reflective of the average price of a new car cresting $48,000 at times in 2022.

But those stats only tell part of the story because monthly payments are on the rise because car buyers are also financing more than before. In the same period in 2022, the average amount borrowed for a new car was $41,445, and $27,768 for a used vehicle. Both were up sharply over the year before and hit record highs.

Factors That Affect Your Monthly Car Payment

The three most significant factors in the amount of your car loan — and the amount you pay every month — are car prices, the down payment amount, and the interest rate.

According to Experian, someone with good-to-excellent credit (generally between 680 and 850) can save more than $80 per month over someone financing over the same period but with a subprime score of between 500 and 600.

That's because of the higher interest rate those with lower credit scores or lack of credit history will have to accept from a lender.

And, with the Federal Reserve's weeks of interest rate bumps starting in 2022, the average new car loan now carries a 6.07% interest rate, while a used car loan interest rate is 10.26% annual percentage rate (APR) — and don't expect those 0% financing deals of the last couple of decades to come back, even from popular brands like Ford and Nissan.

Sometimes additional fees are also rolled into the loan amount, including sales tax, registration tag, and title charges. These costs can add thousands of dollars to a new car loan and increase monthly payments. Stretching out the loan term can lower monthly payments, but longer loan terms mean a higher total cost for your new vehicle.

You can use a loan calculator on many sites to see how a longer finance term will affect the total amount of money you pay for the car. The total interest paid on a longer-term loan will be much higher because of the additional interest accrued over time and because longer car loans generally carry higher interest rates.

Alternatively, consult the bank or credit union you will use or discuss with the automaker's finance company.

Saving Money on the Cost of the Vehicle

If you're considering purchasing a new car, be prepared to haggle over the price. That's going to help you save every dollar on a monthly payment. Dealerships offer discounts for various reasons, like recent college graduates, first responders, and military members, so go over every membership or other incentives to drive down the price even before negotiating.

When at the dealership and finalizing the price, let the salesperson believe you plan to finance the car through the dealership's programs. Sometimes, the dealership works to find a better deal for you if they think you're financing with them.

Another option to consider is visiting other dealerships. For example, if you want to buy a Honda Civic listed at $30,000 at the dealership, a more remote dealership might offer the same car for $29,000. Check the websites for all dealerships within a reasonable driving distance, and know what a fair price is for the exact vehicle you want in your area.

For used cars, research the year, make, and model vehicle you want. Then, look at the Kelley Blue Book value or another online price tool for the car's value. Many variables go into the price of a used car, including mileage, accidents, demand, and condition.

Don't just pay the price the owner asks for the used car. Instead, offer them less and negotiate a final price somewhere between. You want to have a list of questions to ask the owner before agreeing on a price. You might get a reduced price with this information, including the number of previous owners and the maintenance records. Any money you can save on the price of a new or used vehicle helps to lower your monthly car payment.

Cut the Loan Amount

When car buying, borrowers can reduce the loan amount and your monthly payment by getting a less expensive car or hunting down the best deals, but this brings us to the second way to reduce monthly payments: Borrow less money for the vehicle.

Reducing the loan amount will lower your monthly payments, which is easily done with a sizable down payment. Set a goal of how much you want to pay down on the vehicle, and strive to reach it before letting yourself start car shopping. Experts recommend a down payment of 20%, but the average has historically been around 11%, which might not be enough for lenders today.

You can also lower the loan amount by maximizing the value of your trade-in. The trade-in vehicle should be part of the negotiation with the dealership when buying your new car, and getting multiple offers from different dealers (such as CarMax or Carvana) could yield the best deal. Also, consider selling the vehicle to a private buyer and add that money to the down payment because you stand to make more through a private sale than with a dealer trade-in.

Avoid rolling any extra costs into the loan. That can be unpaid money from a previous car loan, extended warranties, or other packages the dealer may try to sell you. For example, adding a $3,000 warranty and $1,000 paint protection amounts to financing an additional 10% on an average car loan.

Look Hard for the Lowest Interest Rates

Whether you finance your vehicle through your bank, the dealership's financial institution, or another lender, you pay an interest rate based on your credit score and sometimes the length of time at your current employer or residence.

Check your credit score online before shopping for loans to help you find the lowest interest rate. Clear up or dispute any incorrect information on your credit report. You may also pay down some of your outstanding credit card debt or another credit account to help boost your credit and therefore receive a lower interest rate.

Also, feel free to play one bank off another while using their online auto loan calculator. For example, if your local bank offers you a loan at 6%, tell the dealership that offers a 7% loan that you already have that offer. They might lower the interest rate a little to get your business. The difference between 7% and 6% could add up to thousands of dollars over the length of the loan.

Consider other financing options as well. If you can find a credit union to join, you can get better terms on your new car loan. Credit unions operate differently than traditional banks because they are not-for-profit organizations, and they may offer better rates when it comes to financing.

Remember that the average monthly car payment is an average, which can be misleading and may not fit your situation. Your monthly car payment will vary based on various factors, some that you can control and some that you can't. Before buying a new or used car and committing to a car loan, ensure you can make that monthly car payment for a few years. Unexpected things come up, so make sure you have a safety net to fall back on.