Is a 36-Month Financing Term the Best Auto Loan Option When Buying a New Car?

When financing a car, a longer loan term can seem attractive to many buyers due to the lower monthly payments. However, those lower monthly payments typically come with a higher interest rate for the length of the auto loan. That’s why lenders offer shorter 36-month loan terms. If you can afford a 36-month loan term, then it could be the perfect sweet spot between financing a car and having financial freedom at a quicker rate. Let’s take a closer look.

A 36-month auto loan has its advantages

Line of cars at a dealership. These cars may have open recalls and still be sold
Line of cars at a dealership | Ina Fassbender/AFP via Getty Images

RELATED: Experian Reports a Record High for Monthly Auto Loan Payments

The main draw of opting for a 36-month loan term is having fewer monthly payments as well as having a lower interest rate than what you would get on a longer-term loan. According to The Balance, “a 36-month car loan, as a term in the middle of the pack, is attractive to buyers that can afford mid-range monthly payments and mid-range interest terms.” In that case, if you can afford the 36-month loan term then you’ll pay less overall by having a lower interest rate and you’ll also finish paying it sooner.

By paying off the auto loan quickly, you’ll not only own the car sooner, but you’ll also free up that extra cash for emergency funds, savings, or extra spending money every month. Let’s not forget the interest rates. Having a lower interest rate can save you a lot of money in the end.

For example, if you were to finance a $25,000 car with no down payment for 36 months and an interest rate of 1.9%, you would pay $739 in interest over the loan term. However, your monthly payment would be $714.

On the other hand, if you were to finance that same $25,000 for 60 months at a rate of 4.9%, then you would pay $3,238 in interest over the length of the loan. Although, your monthly payments would be more manageable at $470.

It’s no wonder that many buyers opt for a 60-month term. However, if you can afford the higher monthly payment, then it’s obvious that the 36-month term can save you some serious cash in the end.

There is one big disadvantage to a 36-month auto loan term

A person driving a car
A person driving a car down a road. | Unsplash

The biggest and most obvious disadvantage of opting for a 36-month car loan term is the higher monthly payments. By paying the higher amount, you won’t have as much money to save every month and if anything happens to the car during the time you have the loan, you may not have money for repairs.

A shorter loan term is a good way to go if you can afford it

A close up of a car's headlight
A person driving a car down a road. | Unsplash

The bottom line is that if you can afford the higher monthly payment of a 36-month loan term, then it could be your best option. Sure, there are longer 48, 60, and 72-month terms, but paying more money in interest can offset those lower monthly payment amounts.

As a happy medium, you could always opt for a longer-term and then pay more money toward the loan every month. That way, if there are some months where you cannot afford the higher payment, you can always resort to paying the lower minimum payment instead.

RELATED: Now Is the Time To Refinance Your Auto Loan