You should aim for a car loan with a term of 48 months (4 years) or less. The shorter the time-frame, the more money you will save on interest costs.
If you can afford the higher monthly payments on a 2 year loan, that's your best option - but realistically, most car buyers will need to get at least a 36 month loan.
A 5 year car loan should be the maximum time frame you consider. If you can only afford payments by extending the loan to 6 years or more, you should be looking for a less expensive vehicle or be willing to wait 3 to 9 months while saving money for a larger down payment.
On a typical $20,000 car loan financed at 7% interest, you will save over $3,000 in interest if you opt for a 2 year loan versus a 6 year loan. The following table shows the amounts you save when comparing different loan terms:
|2 yr||3 yr;||4 yr||5 yr||6 yr|
|2 yr||$0||+ $734||+ $1,503||+ $2,271||+ $3,063|
|3 yr||-$734||$0||+ $769||+ $1,537||+ $2,329|
|4 yr||- $1,503||- $769||$0||+768||+$1,560|
|5 yr||- $2,271||- $1,537||-$768||$0||+ $792|
|6 yr||- $3,063||- $2,329||- $1,560||- $792||$0|
Many car dealers will try to pressure you into extended-term loans, especially if they feel you can't afford the monthly payments on a shorter loan.
Just remember that you'll be paying a lot more over the long-run when you stretch out your car loan. To top it all off, the longer you extend the car loan, the longer you will be upside-down on your car - meaning you will owe more than what the car is worth.