Car finance can be a great way to spread the cost of owning a vehicle. But one of the most important decisions you’ll make is how long your finance agreement should last. In this guide, we break down exactly how different loan lengths will impact: the amount you’ll pay back each month, how much interest you’ll pay overall, and how the age of your car makes a difference. Read on to find out how to make the right choice for you.
How long are typical car finance agreements?
Most car finance agreements tend to last between two and five years, although some can be as short as 12 months or as long as seven years or more. The length of your loan term will depend on the type of car finance you choose, and on how financially flexible you are.
Why are there different term lengths for PCP, HP and personal loans?
Because each type of car finance is slightly different, each will have their own rules about loan terms. There are many different types of car finance available – three of the most popular include unsecured personal car loans (UPL), hire purchase (HP) and personal contract purchase (PCP). You can read about them all in detail in our comprehensive guide to car finance.
UPL
Three to five years tends to be the average length of a personal car loan, but you can find loans of up to seven years or more. With an unsecured personal loan from Oodle, you can choose a loan term from one to five years.
With a UPL, you borrow an amount equivalent to the price of the car you want, and you buy it outright. You’ll own it right from the start, and there are no balloon payments to make or mileage restrictions to consider, which makes a personal loan a great way to buy an older car.
PCP
You can find personal contract purchase deals ranging from one to five years, but they typically run from two to four years.
PCP contracts are often shorter than other finance deals, because the repayments only cover a portion of the cost of a car (the depreciation) rather than the full value. At the end of the contract, you can either pay a lump sum – known as a balloon payment – to keep the car, hand it back with nothing more to pay, or trade the car in for a new one. PCP is a popular choice with those who like to switch cars regularly, making short-term agreements ideal.
HP
Hire purchase agreements can range from one to five years, with the average lasting three to four years.
With an HP agreement, you borrow the full value of the car, and pay it off in monthly instalments, plus interest, over the loan term. Monthly repayments tend to be larger than PCP monthly payments because you are paying off the full value of the car – but you’ll fully own the car at the end of the agreement (once you’ve paid a nominal option-to-purchase fee). HP is ideally suited for a slightly longer-term loan, and there’s no sizeable balloon payment to make at the end.
Whichever finance product you choose, the key points to remember are these: the longer your contract, the lower your monthly payments will be, but the more interest you will pay, and the more your loan will cost you overall.
If you opt for a shorter loan term, your monthly payments will be higher, but you will pay off the loan more quickly. This means that you will pay less in interest – costing you less in the long run.
Aside from the type of car finance you opt for, there are several other key factors that will influence the length of car finance agreement you could be offered.
Credit score
The higher your credit score, the greater choice you will have – you’ll have access to better rates and more options of loan length. If you have a very good credit rating you may be able to access longer loan terms with a lower interest rate, because the lender will view you as a low-risk borrower.
If your credit score isn’t as good as it could be, you might be more limited when it comes to the length of loan you are offered, and you can expect to pay more interest.
Read more about credit scores in our guide: What credit score do I need for car finance?
Deposit amount
If you pay a bigger deposit, this will reduce the overall loan amount, which could - if you want it to - shorten your loan term. Because you are borrowing less, you could choose a reduced loan term and still be within what you can afford each month.
Alternatively, you may prefer a longer loan term to keep the monthly costs down. (Don’t forget, you’ll pay more interest overall if you go for a longer term.)
No-deposit (0% deposit) car finance deals mean you won’t have to pay a lump sum upfront, but they sometimes come with longer loan terms to help spread out the higher cost of the loan.
However, you could choose a shorter loan loan term and make higher monthly payments if you wanted to pay it off more quickly.
Read more about no-deposit car finance.
Vehicle depreciation
Cars lose value quickly, especially in the first few years. If your finance term is long, you could end up owing more than the car is worth – this is called negative equity. While this isn’t necessarily a problem if you bought your car with a personal loan, it is not ideal with a PCP or HP contract if you’re looking to trade in your car or refinance it. This is because you will have to cover the shortfall, or roll the negative equity into a new loan, which could put a strain on your finances – it’s important to be aware of the implications of negative equity if you are considering a longer HP or PCP loan term.
Read more about depreciation and what it could mean for you.
Car and age type
Many lenders factor in the age of the car when deciding how long they are prepared to offer finance for, so it’s worth bearing this in mind when choosing a car loan. Many traditional car finance providers won’t finance a car that’s more than eight years old, for example (by the end of the loan term it would be too old for resale), so you might have to shop around, or consider a personal loan, if you’ve got your heart set on an older model.
Used car finance is often capped at five years due to depreciation and lender policies, although this isn’t usually this case with personal loans. Read more about used car finance and how it works.
New cars usually come with the longest loan terms (often up to seven years) because of their higher value. As newer cars tend to present less risk to lenders, they are often prepared to lend for longer periods, which spreads out the greater cost of a newer car into more manageable amounts.
Affordability
Before agreeing to offer you a car loan, lenders will run an affordability check on you to work out how much they are willing to lend and how long for. They will look at your income, existing debt and your financial history to help them make a decision.
With so much choice out there, it can feel hard to work out what’s best. While there are always exceptions to every rule, here are some general pointers to think about.
Benefits of short-term finance (one to three years)
With a shorter loan term, although your monthly payments will be larger than a longer-term loan, you will pay off the loan faster, and pay less in interest, which means that the loan will cost you less overall.
Shorter contracts are therefore cheaper in the long run – if you can afford to make the higher monthly payments, you’ll clear your debt more quickly and be in a stronger financial position sooner.
There is less risk of negative equity with a shorter term – the car’s value is less likely to drop below the loan balance.
All lenders are legally required to display the monthly payment and total cost of credit on any quote or representative example they provide. This helps customers to see what the total cost of their finance could be over different loan terms.
Drawbacks of short-term finance
Because your regular repayments are higher, you might find that your finances are more squeezed: you’ll have less disposable cash to spend each month. If there is a change to your earnings – you lose your job, for example – you’ll still need to find the money to cover your finance payments. It’s vital that your monthly payments are sustainable for the length of your agreement.
Benefits of long-term car finance (four years or more)
The main benefit of a longer loan term is smaller monthly repayments. Spreading out the cost of the loan over several years can make it more manageable, and perhaps enable you to buy a newer, higher-spec car than you could otherwise have afforded.
Drawbacks of long-term finance
Although your monthly payments will be more manageable, it’s important to be aware that you will be paying more in interest over the lifespan of the loan. This can often make the overall cost of the loan higher than a short-term loan, even though month-by-month you are paying less.
If you do decide to go for a long-term finance deal, take some time to consider how this decision could impact your future financial ambitions. Choosing a lower-spec car could enable you to go with a shorter loan term while also keeping your monthly payments down.
Working out how much your car finance repayments could be is quick and easy with our car finance calculator. Don’t worry, you’re not committing to a purchase, and it won’t affect your credit rating. You can explore different loan terms and different amounts to get an idea of what your monthly payments could look like, to help you decide which loan length is a good choice for you.
This will depend on your personal financial circumstances and your preferences – what’s right for you might not be the best choice for someone else.
The key issue is how much you can afford to pay back each month. If you can afford to pay a bit more, then a shorter loan term (where you’ll pay less in interest and pay off your debt faster) will save you money in the long run. If you’d prefer to keep your monthly payments as low as possible, then a longer term might suit you better.
Another consideration is whether you want to change cars every couple of years, or whether you’d prefer to keep hold of it. If you live for that new car feeling, then you might do well with a two-year PCP agreement where, at the end of the term, you can upgrade your vehicle to the latest model with a new PCP deal.
If you’d prefer to own your car, then a personal loan or an HP arrangement might suit you better. With a UPL, you own your car from the word go; with HP, ownership transfers to you at the end of the loan term, once you’ve made your final payments.
A three- or four-year HP deal could be ideal if you know you’d like to keep the car at the end of term and want to keep your monthly repayments down.
A personal loan is worth considering if you don’t want to worry about mileage restrictions. If you can afford to make higher monthly payments, a short-term two-or three-year personal loan could be a great option.
Final thoughts
There is no one-size-fits-all answer to the question of how long you should finance a car for. Whatever you decide, make sure you do your research first, compare different lenders, and take your time before signing any deal.
As a general rule:
Go shorter, if you can afford it – you’ll pay less in interest and you’ll pay off your loan more quickly.
Go longer if you need lower payments to make it work – just be aware of the extra costs over time.
Does a longer car loan mean lower interest rates?
Not necessarily. In fact, the opposite is usually the case. Longer loans can have higher interest rates, because lenders view longer loan terms as higher risk. To compensate for this risk, they increase interest rates, which increases the overall amount you’ll pay.
Is it better to pay off a car loan early?
Paying off a car finance agreement early will save you money on interest, but there may be early repayment fees to consider. Therefore, you should think about whether this is an affordable option.
If you do decide to pay your car finance off early, you’ll need to request a settlement figure from your lender.
What is the longest car finance term available?
This will depend on the finance provider and the type of finance you’re after. In general, car loans tend to run from between one to seven years. Some lenders will offer longer terms than others, but these will come with higher interest rates and increased overall costs. When it comes to car finance, a better question to ask yourself could be: what’s the shortest loan term I can afford?
