How Loan Term Affects Your Monthly Payment and Total Cost

How Loan Term Works

The loan term is the length of time you have to repay the loan. Auto loan terms typically range from 12 to 84 months, with 12-month increments being common. Shorter terms mean higher monthly payments but less total interest, while longer terms spread the cost out over more months, lowering each payment but increasing the total interest paid.

When you choose a longer term, the lender has more time to collect interest, so the overall cost of the loan rises even if the annual percentage rate (APR) stays the same. For example, on a $20,000 loan at 4.75% APR, the 72-month term costs $3,024 in total interest compared to $1,498 for the 36-month term—more than double.

Sources: Consumer Financial Protection Bureau

Monthly Payment Formula

Lenders use a standard formula to calculate your monthly payment based on the loan amount, interest rate, and term length. The formula accounts for the principal (the amount borrowed) and the interest that accrues each month. A longer term reduces the monthly payment because you are dividing the principal and interest over more months.

For example, using a $20,000 loan at 4.75% APR, the monthly payments for common terms are: 36 months—$597; 48 months—$458; 60 months—$375; 72 months—$320. Notice that moving from 36 to 72 months cuts the payment by $277 per month, but the total interest increases by $1,526.

Sources: Consumer Financial Protection Bureau

Longer Term Pros and Cons

However, longer terms have significant downsides. You pay much more in total interest, and there is a higher risk of negative equity—owing more on the loan than the vehicle is worth. This happens because cars depreciate over time, and a longer term gives the vehicle more time to lose value faster than you pay down the principal.

Sources: Consumer Financial Protection Bureau, Sunward Credit Union

Shorter Term Pros and Cons

A shorter term, such as 36 or 48 months, means higher monthly payments but lower overall interest costs. You’ll build equity in the vehicle faster, reducing the risk of owing more than it’s worth.

The main challenge is the higher monthly payment, which may strain your budget. Some financial experts recommend keeping auto loans to five years (60 months) or less to avoid the risks associated with longer terms.

Sources: Consumer Financial Protection Bureau, NerdWallet

Choosing the Right Term

When deciding on a loan term, consider your monthly budget, how long you plan to keep the car, and the total cost you’re willing to pay. A longer term lowers your payment but increases the total interest and the chance of negative equity. A shorter term saves on interest but requires a higher monthly payment.

Here are some factors to weigh:

Your budget: Can you comfortably afford the higher payment of a shorter term?

Vehicle depreciation: If you plan to keep the car for many years, a longer term might still leave you owing more than the car is worth early on.

Interest rates: Sometimes longer terms come with higher APRs, which increases the total cost even more.

There’s no one-size-fits-all answer, but experts generally suggest sticking to 60 months or fewer if possible.

• Monthly payment affordability
• Total interest cost
• Risk of negative equity
• How long you’ll keep the vehicle

Sources: Consumer Financial Protection Bureau, NerdWallet

Example Scenarios

To illustrate the impact of term length, consider these examples with different loan amounts and rates. Remember that the figures are not directly comparable across examples because the loan amount and APR differ.

Sources: NerdWallet, Investopedia

decision-criteria matrix

When comparing loan terms, focus on the key decision criteria: monthly payment, total interest, and risk of negative equity. Here’s how shorter and longer terms generally stack up:

Sources: Consumer Financial Protection Bureau, Sunward Credit Union