5 Reasons Savvy Car Buyers Choose Short-Term Car Loans

Short-term car loans make good financial sense if you can afford them. You’ll often pay less in total interest in exchange for a higher monthly payment.

Saving money over the life of the loan is a smart thing to do, but only choose a shorter loan term if you can afford the monthly payment.

What’s a short-term car loan?

Most new auto loans have repayment terms of 61 to 72 months. The definition of a “short-term car loan” can vary. Some people consider 36 months (three years) short term, while others consider 60 months (five years) to be a short-term option.

Five reasons to choose a short-term car loan

Most of the time, the shorter the term, the less you’ll pay for your car loan — here’s how.

1. Save on total interest

Opting for a short-term car loan often reduces the total amount of interest you pay. You can save more than $4,500 on the average car loan by financing for 36 months instead of 72 months.

Here’s how we did the math. According to a study by Experian, the average borrower financed $40,634 for a new car with an average annual percentage rate (APR) of 6.73% in the first quarter of 2024.

Using these numbers, the table below shows how much interest you’ll pay depending on how long you stretch out your loan payments.

Choosing the 36-month loan over the 72-month term will keep more than $4,500 in your wallet over the life of the loan, but the monthly payment will be $562.14 higher. This may make a short-term loan a stretch for your budget.

Use one of our auto loan calculators to try out different terms for your car loan.

2. Get a lower interest rate

You may be able to qualify for a lower rate on a short-term loan. In fact, 0% APR car deals often come with terms of 36 months.

Experian estimates that new car loans with terms under four years come with an average interest rate of 3.98%, while terms above 85 months have an average interest rate of 9% — that’s more than 5% higher for a long car loan.

3. Build equity faster

With short auto loans, you pay down the loan faster, so you will be less likely to owe more than the car is worth. This is important because negative equity makes it harder to sell or trade in the car before the loan is paid off.

4. Save on insurance

Auto lenders typically require borrowers to buy full-coverage auto insurance, but once you own the car, you can carry only the insurance required by your state. Opting for a short-term loan means you can make this money-saving switch sooner.

5. Use the savings for investments or other expenses

When you save on your short-term car loan, you can use leftover money for vacations, investments or an emergency fund.

Downsides of short-term car loans

While you’ll save on interest with a short-term auto loan, you have to consider whether you can afford a higher car payment. You don’t want to put yourself in a position of financial stress or risk being unable to make your payments.

Higher monthly payments

The higher monthly payments that come with a short auto loan can put a lot of stress on the rest of your budget. It’s vital to ensure that you have the monthly cash flow to cover all of your expenses.

How much should your car payment be? Experts recommend that your total transportation costs — like your car payment, insurance, repairs and gas — stay below 10% of your monthly income.

Opportunity costs

If a large portion of your monthly income goes toward your car payment, you may be missing out on contributing to your retirement fund, or you may not be able to swing your dream vacation until the loan is paid off.

What to know about long-term car loans

In early 2024, the average auto loan for a new car was almost 68 months. Here are a few things you should consider before you commit to a long-term car loan.

• Higher interest rate: Interest rates are typically higher for longer-term loans, adding to the overall amount you will pay for the car.
• Danger of being upside down: With a longer-term loan, you run the risk of owing more than the car is worth for at least part of the loan term. You can reduce that risk by making a larger down payment or paying additional principal on your loan each month.
• Lower monthly payments: The car salespeople aren’t wrong: A longer term will give you a lower monthly payment. But be aware of how much more that lower payment will cost you over the life of the loan.
• Higher total cost to borrow: The total cost of borrowing will be greater due to higher interest rates over a longer term. Staying within your monthly budget is important, so many people opt to pay more over the longer term with a lower payment, even if it means a higher total cost in the end.

Refinancing to a shorter auto loan

You can shorten the term of a car loan you already have by refinancing your auto loan. For example, if you have five years left on your car loan, you could refinance to a three-year term.

Keep in mind that lenders may have mileage and/or age restrictions on the cars they will refinance. You can refinance an auto loan even if you’re upside down on the car.

Like financing a car for the first time, refinancing to a shorter term may also mean a higher monthly payment, unless you are able to get a lower interest rate. Consider refinancing if any of these situations apply to you:

• Your income changes
• Your credit score improves
• Interest rates drop
• You want a different loan term

Here’s more information on when to refinance a car loan and when to wait.

How to choose the best car loan for you

The best car loan for you depends on several factors, including your financial situation. Do some research before you sit down in the dealer’s financing office.

1. Determine your budget. Look at your monthly obligations and determine how much you can allocate toward a car payment. This will help you determine whether a short-term auto loan is possible for you.
2. Check your credit score. Your credit score helps determine the interest rates and terms you will be offered. Check your score for free with LendingTree Spring to see if your score is high enough to qualify for lower rates that might make a short-term loan a possibility for you.
3. Get preapproved. An auto loan preapproval is a lender’s official offer to let you borrow up to a maximum amount for a set term and APR. Don’t forget to add taxes, registration and licensing fees to the amount you’ll need to borrow. Then compare your preapproval with the dealer’s financing offers. You can receive auto loan offers from up to five lenders at once by filling out a single form with LendingTree.
4. Compare offers. Look at the rates and terms included in the offers you receive. Make sure you understand the impact of the monthly payment and the loan term on your total cost to borrow.

Alternatives to a short-term auto loan

Make a larger down payment

Putting more money down at the time of purchase lowers the amount you have to borrow. You can reduce monthly payments to a manageable amount by opting for a short-term auto loan with a larger down payment.

Pay more each month

You can pay ahead on the principal each month to reduce the amount of interest over the life of the loan. You could take out a loan for 60 months but make the payments as if it’s a 36-month loan and save yourself a lot of money. By doing this, you still retain flexibility — if for some reason you can’t make the extra payment in a month, you won’t risk delinquency.