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Popular Car Loan Terms – 2, 5, 7 Years

Jacaranda Team

Jacaranda Team

โ—January 14, 2021โ—5 minute read
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It’s not easy for every Aussie to front the bill of a brand new or even used vehicle. Luckily auto loans exist, and you could spread them over the years. Your repayments depend on how long or short-term the duration of the advance is. But the sum you need to cough out at each mark comes down to more than basic arithmetic, where you can divide the total amount by the number of instalments. On the contrary, the total amount can vary depending on the loan duration. As a borrower, it’s essential to know the relationship between these two variables so that you can make more informed financial decisions. In this article, we’ll unpack everything you need to know about loan terms using the most popular lengths lenders offer with their products.

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    What informs the length people choose?

    The duration of an auto loan can range from anywhere between one-ten years. It all depends on the lender and the circumstances surrounding the loan. People have different reasons for choosing the length they do. Banks usually prefer short term loans because the interest rates are higher, and they get a relatively quick return. Individuals may opt for a small duration of one-three years because they’re in a tight spot, and need some funds to resolve it. Shorter advances are more comfortable to acquire, and since the amounts are relatively small, quite easy to pay off.

    In comparison, other people opt for longer durations of seven-ten years because they can spread their payments into more instalments, thereby reducing the monthly amount. It is ideal if you intend on borrowing a substantial capital, so the weight of repayment isn’t too burdensome on your expenses. You have eighty-four instalments to pay off a seven-year loan, but only thirty-six to cover a three-year loan, if you’re using a monthly plan.

    Whatโ€™s the relationship between length and interest?

    As we hinted earlier, short term loans tend to incur a higher annual percentage rate than longer loans. But that isnโ€™t always so. On the contrary, when you pass a specific point, the interest rate begins to rise rather than go down. If we were to plot a graph of loan term against interest rate, you would observe a peculiar trend. In the beginning, borrowing rates would be high and steadily fall as you increase the number of years. Then they begin to rise again after a specific point.ย  They’re typically at their highest between two-three years, and then at the lowest at the five-year mark, and finally swell also at the seven-year end. Those marked points are the reason the popular terms is two, five and seven years. People looking for short term loans will often favour a twenty-four months repayment scheme, and the average loan term for longer durations is eighty-four months. Finally, people looking for the lowest rates, rest comfortably at the sixty months or five-year mark.

    It’s not compulsory for all vehicle advances to come in twelve-month increments; on the contrary, the lender and borrower can agree on any duration that suits them. This method is more common because they are easier to track, but you can decide on the length you prefer.

    Strategies for making the most of your car loan term

    Whatever your reason for choosing a specific duration, you can still make the most of it. There are ways you can cover the advance without spending a lot of money on interest rates and charges. Some of the tips you can use are:

    Select a low APR loan: The easiest way to avoid high-interest rates is to go for a low-interest rate loan. Please do your research and try to find out the lowest APR, they’re usually around the five-year mark. By doing so, you can save anywhere from a few hundred to thousands of dollars. It all depends on the amount and percentage.

    Put up a large down payment: A down payment is an excellent way to reduce the total amount you have to pay back. It also significantly decreases the amount you have to pay at each instalment, which can free you up to make more investments. Plus, it’s an excellent way to abstain from negative equity.

    Opt for a balloon payment: An excellent alternative to making a down payment is going with a residual value option. Not everyone has the funds to make a substantial payment at the beginning of their loan, so if it’s more convenient for you to make it at the end, you can do so. With a balloon option, you can also reduce your monthly payments.

    Use an online car loan calculator: When you increase the length of your loan term, the interest rate and the accumulation of ongoing charges can exceed the value of the vehicle. So you might end up paying more for your car than itโ€™s worth in the long run. But there are several available services online that can provide an estimate of how much you would spend in total throughout the loan; some lenders are even happy to work it out for you. It would be best to take advantage of such services so you have an idea how much a car loan will cost you. Also, you can vary the loan term to find which arrangement is most convenient for you.

    Increase your creditworthiness: Irrespective of the duration you decide on, youโ€™re more likely to get a lower APR if you have a clean credit record. So it’s in your best interest to avoid declaring bankruptcy and pay your bills on time to keep your score high. The truth is, the lower your score, the less trustworthy lenders regard you, and they will increase their interest rates because you are high-risk.

    Go for a lease: Leases have cheaper fees compared to loans, so if you’re short on funds, it might be a better option for you till you can afford a good vehicle advance. Some owners will even be willing to sell the car to you at the end of the term.

    To conclude, other variables can affect the APR of a loan like the interest rate, the type of loan and so on. As we’ve shown you, the loan term is also one of those variable, and being informed can help you make better decisions.


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    Jacaranda Team
    Jacaranda Team

    Written by Jacaranda Team

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