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What is the maximum car loan term

What is the maximum car loan term

In the market for a new car loan? Depending on your budget and personal financial circumstances, you may be wondering what the maximum car loan term is that you can apply for.

Generally speaking, most car loan providers offer a maximum term of up to 7 years in Australia. Borrowers commonly tend to apply for loans in the 2 - 3-year range.

But there are a few car loan lenders offering longer car loan terms. As of writing this, there are four lenders offering maximum car loan terms of 8 years, and one offering a maximum car loan term of 10 years.

High car loan terms

Car loan providerProductMax Loan Term (in months)Minimum Loan Amount
People's Choice Credit UnionDiscounted Personal Loan

120

$20,000

Firefighters Mutual BankSecured New Car Loan

96

$10,000

Health Professionals BankSecured New Car Loan

96

$10,000

Teachers Mutual BankSecured New Car Loan

96

$10,000

UniBankSecured New Car Loan

96

$10,000

Source: RateCity.com.au. Data accurate as of 21.06.2021.

But while a 10-year car loan may sound like a competitive deal, it’s worth keeping in mind there are risks associated with longer term loans.

What are the risks and benefits of long car loan terms?

Put simply, the longer the car loan term, the lower your monthly repayments. But the longer the loan term, the greater amount of interest you will be charged over the life of the loan.

This may see the total cost of a car loan balloon well past the principal amount, even doubling the price in some extreme cases, depending on the loan term, interest rate and fees.

The shorter the car loan term, however, the less interest you’ll be charged overall but the greater your ongoing repayments will be. This is because you’re chipping away at the principal at a faster rate than spreading out those repayments over several years.

Currently, the average car loan interest rate on the RateCity database sits at 8.44 per cent. On a $20,000 car loan, here are how the different repayments would work out over various fixed loan terms.

Repayments on $20k car loan over different loan terms

Loan termMonthly repaymentsTotal cost of loanTotal 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$25,5585558
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 $20,000 car loan with a fixed rate, average interest rate set at 8.44 per cent, does not factor in fees. Data accurate as of 21.06.2021.

If you compared the 2-year car loan term versus the 5-year car loan term you can note the advantages and disadvantages of short- and long-term loans. While the 2-year car loan charges higher monthly repayments, you’re only paying $1,806 in interest over time.

If a borrower could afford these higher monthly repayments, this option may better suit their finances as they’re saving $2,739 in interest by not spreading out repayments over 5 years.

However, if a borrower needs to reduce their ongoing costs, a longer car loan term may offer some relief. The monthly repayments will be lower but, understandably, they will pay more interest over the life of the loan.

What car loan term best suits my finances?

If you’re not sure what car loan term may best suit your finances, it’s worth using a car loan calculator to work out the potential short- and long-term costs, just as was done in the above table.

After you compare your car loan options on a comparison table and narrow down a few choices, hop on to the RateCity Car Loan Calculator. There you can enter the amount you’d like to borrow, interest rate of one of your car loan options, as well as your loan term.

Now, play around with the car loan terms to view different results. If you know you can only budget for, say, $600 a month in ongoing repayments, you may choose a car loan term based on this monthly limit.

This is why there is no one best car loan term for each borrower. The right car loan term for you will depend on your budget, financial goals and situation.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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