Cars are expensive, but most of us need a ride, especially in bustling, car-centric Canadian cities.
That’s why Canadians are taking out loans in droves to finance the car of their dreams (or something similar). And with the multitude of decisions to make, setting loan terms can become exhausting and frustrating.
Lenders are becoming more sensitive to the needs of borrowers and are providing offers to suit individual needs. But what suits most borrowers, and what is the average car loan length? What terms should you choose and how do you negotiate the length of your loan?
Stick around for all the answers!
What Is the Average Car Loan Length?
Gone are the days when the usual car loan length was 3 or 5 years. Nowadays, it seems like people have been favouring longer loan terms, and for good reason.
In recent years, lenders have seen an increase in the life of a car loan. Namely, more and more people have been opting for 6-year (72 months) and 7-year loans (84 months). But just because this is the average car loan length doesn’t mean there aren’t people who take out shorter or even longer loans.
There also seems to be a noticeable difference in the loan terms for used cars, as these are usually taken out on terms longer than 5 years (60 months). The length of a loan for a used car has seen an increase, with Canadians choosing 72-month-long loans instead, just like with new cars.
Overall, the length of a car loan has increased over the years and buyers have become pickier.
However, the term also depends on the borrower’s credit score. Generally, a credit score of 760 or above secures a lower APR and shorter terms. Conversely, a credit score below 580 suggests someone has debt defaults, bankruptcy, or difficulties with monthly payments, which significantly raises the loan rate and term.
Currently, the average car loan interest rate is around 5% to 6%, although it ultimately depends on individual circumstances, like the value of the vehicle, your credit history, the length of the loan, the size of the down payment, etc.
Longer vs Shorter Loan Term
So how do the overall costs differ when taking out a longer vs a shorter loan term?
Well, although there is no objectively better option, depending on your circumstances, you might be more inclined to get one or the other. Below, we’ll talk about what you can expect from either one:
Long-Term Car Loans
Longer-term loans are popular among car buyers mainly due to the possibility of making smaller monthly payments. A longer auto loan term allows for spread-out payments over a longer period of time, which makes each payment more affordable.
For example, if you’re financing a $25,000 car for 5 years with a 13% sales tax, no down payment, and a 4% APR, your monthly payments would cost $527. However, if you extend your loan term to 6 years, your payments will decrease to $448. For some, this can make a big difference and have a solid impact on your monthly budget.
But even though long-term loans are more affordable by month and come in handy when you’re trying to strap your monthly spending, you’ll have actually paid more by the end of the loan due to the piled-up interest. Plus, with a loan longer than 5 years, you can be paying for the car even after the warranty expires, thus incurring repair fees and negative equity.
Currently, the longest loan term for a car in Canada is 96 months, i.e. 8 years, but some specialty lenders might offer a 10-year loan.
Short-Term Car Loans
On the other hand, many people prefer shorter-term loans because they can also bring about numerous benefits and suit certain lifestyles. Namely, a short length of a car loan will enable you to pay less in interest in the long run, which consequently translates to less risk overall.
If you’re able to look past the high interest fees, you can have full ownership of your vehicle soon after purchase, maybe even after a year. Therefore, you’ll drive it longer without paying any monthly payments than you would if you had taken out a long-term loan. Plus, if you get car fatigue and want to sell your vehicle after some time, it will still have a high resale value.
However, keep in mind that to be approved for a short-term loan, you’ll need to put down a larger down payment, sometimes up to 20% of the vehicle’s price. Additionally, since your term is shorter, you’ll need to pay the entire amount in less time, leading to higher monthly payments.
So, if you’re budgeting and can’t splurge much on your monthly car payments, a short-term loan will likely set you back.
How to Negotiate Your Car Loan Length?
Regardless of what preconceived notions you have, the length of a car loan isn’t set in stone. In fact, there are several steps you can take to negotiate and impact the duration and interest rates of your loan.
Here are some tips:
Have a Good Credit Score
To have more leverage during your negotiations, you’ll have to make sure you have a good credit score attached to your name. If your score is subpar, you’ll have difficulty securing a loan with favourable terms and more often than not, you’ll be at the mercy of your lender.
With a good and accurate credit report, you can check what terms and rates you’re likely to qualify for, so you’d know if you’re getting a reasonable offer. Therefore, check your score and report a few months before applying for a car loan to give yourself sufficient time to increase your numbers or correct errors.
Determine a Budget
The length of a car loan should fit within your budget without straining it. However, you won’t be able to bargain for better terms or rates without knowing how much you can realistically afford to pay monthly for your car loan.
So, it’s essential to look at your monthly household budget and determine how much money you have set aside for other expenses like rent, food, utilities, etc. Then, calculate what that leaves you with and whether it’s enough to sustain car payments. But keep in mind that you’ll have to pay for maintenance, repairs, gas, and car insurance, so leave wiggle room.
Compare Loan Quotes
Once you improve your credit score and determine a budget, you can start shopping around. To get a better understanding of what you qualify for, ensure you get quotes from at least 3 different lenders, whether that be banks, credit unions, or others. Then, start comparing.
If you want to get the best deal possible, don’t just look at the auto loan term or the interest rates. Instead, take every aspect into consideration and look at the big picture. However, avoid making too many loan inquiries when shopping around because every application knocks a few points off your credit score (although this will improve after getting the loan).
Focus on the Total Cost
Even though it’s tempting to nitpick every aspect of the payment and focus exclusively on the monthly costs, you should shift your attention to the total cost of the loan. This doesn’t mean you should opt for the lowest monthly payment possible without question, just to calculate and determine how much you would have paid when the loan term is up.
Usually, short-term loans allow you to pay less in the long run because you’re saving more on interest fees.
Ultimately, you can also use an online loan calculator from some of the best car loan lenders in Canada to figure out what will cost less overall.
Choose a Larger Down Payment
A sizeable down payment will keep costs down in different ways, like reducing the total amount you have to borrow, which results in a shorter-term loan with a lower APR in the long run.
Plus, bigger down payments improve loan-to-value ratios (LTV) and encourage lenders to make you a good offer because of the low risk. With that, you’ll get better rates and a beneficial length of your car loan. Finally, with a chunky down payment, you’ll ensure your car’s value stays above the amount you owe because you own more of it outright.
Now that you’ve learned what the average car loan length is and how it impacts your future finances, you make an informed decision. Remember that at the end of the day, it doesn’t matter what most people choose.
In fact, what matters is which loan is right for you and what you want to get out of it. Loans can be tricky, but by following our expert tips, you can effectively negotiate a rewarding offer.
Typically, the average car loan length is 72 months, or equivalent to 6 years. However, many lenders have observed an increase in the number of people opting for longer loans, even up to 120 months, or 10 years.
The terms of car loans can range in duration from very short (12 months) to very long (120 months). But generally, most people finance their cars for about 72 months.
The amount of time it would take you to pay off a car depends on multiple factors. Namely, if you get a shorter loan term, such as 12 months, you’ll have fully paid for your car 1 year from now. But if you’re currently not in the most advantageous financial situation, you’ll likely take out a longer loan and will be repaying it for years, usually 6 or 7.
An auto loan term is the terms and conditions involved when borrowing money from a lender to finance a car you want to purchase. Essentially, it’s the amount of time it would take you to completely pay off your loan, provided you stick to your regular monthly payments.