How long should your car finance term be?
There’s no one-size-fits-all answer to how long a car finance agreement should be. It depends on your financial situation, how long you plan to keep the car, and your priorities when it comes to affordability and total cost.
Like everything, there are pros and cons to consider. So to help you make an informed decision and choose the best deal you’re eligible for, we’ve highlighted some key considerations.
How long is a car loan typically?
Car finance agreements in the UK can last between 24 and 60 months (two to five years). The length of your contract will depend on the type of finance you choose and what works best for your budget.
The length of your loan will also determine how much you pay each month, and the total cost of borrowing after factoring in interest. That’s why it’s important to always check the total cost of the loan, including interest and any additional fees, before agreeing to a finance deal.
It’s also important to compare the APRs (Annual Percentage Rates) for different finance terms, as the APR will affect the overall cost of the loan.
Factors to consider when choosing a car loan length
When deciding how long your car finance contract should be, you may want to consider the following factors:
Monthly affordability
One major factor to consider is how much you can afford to pay each month. A longer term usually means lower monthly repayments, while a shorter term means higher monthly payments. It’s important to choose a loan length that fits comfortably within your monthly budget and other financial commitments. Make sure to consider all costs of ownership, such as insurance, maintenance, and taxes, in addition to your monthly repayments.
Total interest paid
Another big factor is interest. Typically, the longer the term, the more interest you’ll pay over time. Even though a longer term might be more affordable each month, you could end up paying significantly more in total compared to a shorter term loan.
Depreciation and negative equity
Depreciation is how much a car loses value over time. Most cars lose value quickly, especially in the first few years. If you choose a longer finance term, it’s more likely that your car will be worth less than what you owe. This is called negative equity. Shorter loan terms could mean you're less likely to face negative equity. You pay off the loan faster, which keeps your balance closer to the car’s real value.
This is especially important with a PCP car loan as the final balloon payment (the lump sum if you want to own the car) is based on the car’s predicted value at the end of the term, but it's also a risk with any form of car finance, so be sure to factor this into your decision.
Future financial plans
It’s really important to think long term. Consider how long you’re comfortable making repayments. If your circumstances change – such as a new job, or starting a family – your finance deal still needs to fit in your budget. You might not want to lock into an agreement that you can’t commit to long-term.
How long you plan to keep the car
If you like changing cars every few years, a shorter PCP deal or lease might be best, so you’re not stuck with a car you don’t want for a long time before giving it back. But if you plan to keep the car long-term, a longer HP loan (where you own the car at the end) could make more sense.
Pros and cons of long vs short car finance terms
There are pros and cons to long and short car loans. Shorter loans can sometimes mean less overall because you save on interest, but longer loans could be more affordable on a monthly basis. Here are the potential pros and cons at a glance.
Longer car finance terms
Pros:
Lower monthly payments (making it easier to afford a better car)
Better for a tight monthly budget with other financial commitments
Cons:
Higher total interest paid over the term
Greater risk of negative equity (especially with PCP)
May take longer to own the car outright if that’s your goal
Shorter car finance terms
Pros:
Less interest paid overall, which could save you money
You’ll own the car sooner
Less risk of being in negative equity
Cons:
Higher monthly repayments
May mean choosing a cheaper car
Could put more pressure on your finances if unexpected costs arise
What’s the best car finance term for you?
The best car loan length comes down to what you prioritise. If you want to minimise monthly payments as much as possible and don’t mind paying more overall, a longer term is best for you.
But, if you can afford a bit more monthly, a shorter term could be cheaper in the long run, because you’ll pay less interest.
There’s no right or wrong; just what best suits your personal financial circumstances. Using our free car finance calculator will give you a good idea of the loan you could be eligible for, and how much interest you might expect to pay overall.
The takeaway
The length of your car finance contract will affect your monthly payments and total cost at the end. Ultimately, the best term for you will depend on your personal budget and long-term plans.
Before committing to a loan, compare different term lengths, work out how much interest you’ll pay, and choose an option that fits your needs.
This guide is for informational purposes only and does not constitute financial advice. For personalised advice on car finance lengths, we recommend consulting a financial advisor.