Looking for a new car loan? Depending on your budget and personal financial situation, you may be wondering what is the maximum car loan term you can apply for.
Generally speaking, most car loan providers offer a maximum term of 7 years in Australia. Borrowers generally tend to apply for loans over a period of 2-3 years.
But there are a few auto lenders that offer longer auto loan terms. As of this writing, there are four lenders offering a maximum auto loan term of 8 years and one offering a maximum auto loan term of 10 years.
High car loan terms
Source: RateCity.com.au. Data correct as of 06.21.2021.
But while a 10-year car loan may seem like a competitive offer, it should be borne in mind that there are risks associated with longer-term loans.
What are the risks and benefits of a long term car loan?
Simply put, the longer the term of the car loan, the lower your monthly repayments. But the longer the term of the loan, the more interest you will be charged over the term of the loan.
This can see the total cost of a car loan exceed the principal amount, or even double the price in some extreme cases, depending on the length of the loan, the interest rate, and the fees.
However, the shorter the term of the car loan, the less interest you will be charged overall, but the larger your current repayments will be. Indeed, you reduce the capital faster than spreading these repayments over several years.
Currently, the average interest rate for auto loans based on RateCity’s database is 8.44%. On a $ 20,000 car loan, here’s how the different repayments would work on different fixed loan terms.
Repayments on a $ 20,000 car loan on different loan terms
|term of the loan||Monthly repayments||Total cost of the loan||Total interest charged|
|1 year||$ 1,744||$ 20,926||$ 926|
|2 years||$ 909||$ 21,806||$ 1,806|
|3 years||$ 631||$ 22,709||$ 2,709|
|4 years||$ 492||$ 23,635||$ 3,635|
|5 years||$ 410||$ 24,585||$ 4,545|
|6 years||$ 355||$ 25,558||5558|
|7 years||$ 316||$ 26,555||$ 6,555|
|8 years||$ 287||$ 27,574||$ 7,574|
|9 years||$ 265||$ 28,616||$ 8,616|
|10 years||$ 247||$ 29,680||$ 9,680|
Source: RateCity. Note: Figures based on a $ 20,000 fixed rate auto loan, average interest rate of 8.44%, do not include fees. Data correct as of 06.21.2021.
If you compare the 2 year auto loan term to the 5 year auto loan term, you can see the pros and cons of short and long term loans. While the 2 year car loan charges higher monthly repayments, you only pay $ 1,806 in interest over time.
If a borrower could afford these higher monthly repayments, this option might suit their finances better as they save $ 2,739 in interest by not spreading the repayments over 5 years.
However, if a borrower needs to reduce their running costs, a longer auto loan term can provide some relief. Monthly repayments will be lower, but naturally they will pay more interest over the life of the loan.
What auto loan term best suits my finances?
If you are not sure which car loan term is best for your finances, it is worth using a car loan calculator to calculate the potential costs in the short and long term, as has been done. in the table above.
After you have compared your car loan options on a comparison table and refined a few choices, go to the RateCity car loan calculator. You can enter the amount you want to borrow, the interest rate for one of your car loan options, and the length of your loan.
Now play around with the car loan terms to view different results. If you know that you can only budget for, say, $ 600 per month in ongoing payments, you can choose a car loan term based on that monthly limit.
This is why there is no best auto loan term for every borrower. The length of your car loan that’s right for you will depend on your budget, financial goals, and circumstances.