The length of your car loan determines how long you'll make payments on your automobile, plus how large those payments will be. With more term options than ever, you may wonder which is the best — something as short as 36 months? Or should you opt for one of the longest terms, like 84 or even 96 months?

Here's everything to consider as you weigh your financing options for your next vehicle purchase.

Interest rates

Longer loans tend to come with higher interest rates due to a greater risk for the lender. That's because there is more time for the borrower to default on the loan. Plus, the car continues to lose its value each year. Even if you end up paying less each month, longer terms with higher rates mean that you'll ultimately pay more than if you chose a shorter loan term.

Monthly payments

Many people are attracted to longer loan terms because the loan amount is spread out over more time, making the monthly payments smaller. That can free up money in your budget, but it also means you'll be in debt for longer. And as your car ages, you may end up spending money on repairs as well as that monthly payment.

Depreciation

This is the process of a vehicle (or any asset) losing its value as it ages. The highest level of depreciation occurs in the first year, when car values typically drop between 20 and 30%. After that, it averages about 15% each year.

A longer car loan term means smaller monthly payments, but that also means you'll be putting less money towards your principal balance. And if your car depreciates a lot in the first few years, you could end up owing more than the car is worth.

How to choose your auto loan term

All of these considerations should be on your mind as you compare car loan terms. But also think about your personal financial situation.

  • Credit score: In addition to your loan term, your credit impacts your interest rate. If you have a good score in addition to a shorter term, a lower rate could help keep your monthly payments comfortable.
  • Budget: The price of your car (along with the size of your down payment) also affects your interest rate and overall monthly payment. If you can only afford a vehicle by taking out the longest loan available, you may want to consider looking at cars at a lower price point.
  • Future financial goals: Taking out an auto loan adds to the total amount of debt you carry. If you plan to apply for other types of financing in the near future, such as a mortgage, you may want to improve your odds of approval by getting out of auto debt as quickly as possible.

Ready to compare loan options with ACU of Texas? Start the application process online or call to chat with a loan officer to help you weigh the pros and cons of each car loan term.