How long should I finance my car for?

One of the biggest benefits of getting a car on finance is that you get to drive away in your sweet new ride without having to fork out the full price in one go. Cars are awesome but expensive, so it’s really handy being able to spread the cost over time - but how much time? 

When you’re looking around for car finance, you’ll see that there’s a fair bit of flexibility when it comes to the length of the agreement. So how do you know what length of time to sign up for? Let’s take a look at what you should consider.

How long are typical car finance agreements?

It depends on a few things, including the type of car finance you choose, but generally car finance agreements usually run from 12 to 60 months (one to five years if you can’t do the quick maths).

You’re ultimately in charge of choosing how long you want your contract to be. 

If you go for a longer contract, the monthly payments will be lower, but you’ll pay more interest because you’ll be borrowing the money for a longer period of time. This means that although the amount you repay each month will be smaller, the total amount of money you have to pay back overall will be higher. Sounds illogical, but it’s true!

If you can afford to pay a bit more each month, then going for a shorter contract means you’ll pay less in interest, and you’ll get to the end of your contract sooner.

Why are there different term lengths for PCP, HP and personal loans?

When we talk about ‘car finance’ we’re actually talking about a few different ways to pay for a car. There’s personal contract purchase (PCP), hire purchase (HP), and good old-fashioned personal loans.

They all work in slightly different ways, which is great because we’re all unique individuals with different circumstances and preferences. One of the differences between the various types of car finance is the length of agreement available.

PCP deals typically last between two and four years, whereas HP deals tend to run for between two and five years, and personal loans can last even longer.

PCP contracts tend to be on the shorter side, because your repayments aren’t designed to cover the full value of the car. Instead, you’re covering the car’s depreciation (the amount the value drops over time) plus interest. This is also why the repayments tend to be lower than with HP contracts. At the end of your PCP contract, you can choose to pay a lump sum known as a balloon payment. It doesn’t come with a balloon (boo!), but it does pay off the full balance of what the car’s worth, and then you’ll own it (yay!). You don’t have to do this though - if you’d prefer, you can hand the car back without paying the balloon payment.

With a HP contract, your repayments are intended to cover the car’s full value, plus interest. When you reach the end of your contract, there’s a small one-off fee to pay (typically called an option-to-purchase fee), and then the car is all yours.

When it comes to personal loans, you’re borrowing the money you need to buy the car outright (so you own it from day one), and you’re paying back that full amount, with interest. You can choose how long you want to spread the cost for, bearing in mind that the longer your loan term, the more interest you’ll pay.

What affects the term length for car finance?

When you’re shopping around for car finance, lenders will take lots of things into consideration before they offer you a deal. 

Lenders aren’t exactly known for being adrenaline junkies, and they’re generally looking for the lowest-risk option, so one of the things they’ll look at is the age of the car you want to buy. Most lenders won’t finance a car that’s older than 15 years, and some won’t even consider one older than seven years. They’ll factor in the car’s age when they’re figuring out how long they might be willing to lend to you for. Here at Carmoola we realise that age is nothing but a number and will finance cars that reach 15 years old by the end of the agreement term length.

Lenders also have to consider affordability - that is, whether you can afford to keep up with the repayments. They’ll ask for proof of your income, like payslips or bank statements, as well as information about your major regular outgoings, like your mortgage or rent. This will all factor into the length of contract they’re prepared to offer you.

What are the pros and cons of long and short-term car finance?

With so many options out there, and so much flexibility, it can be hard to see the wood from the trees. How can you compare car finance deals when there’s so much choice? Here’s some general pros and cons to help you decide.

Pros of long-term car finance

Lower repayments

The longer your car finance contract, the lower your monthly payments will be, because you’re spreading the cost over a longer period of time. This means you can potentially keep some wiggle room in your budget, so you have more money available to save, or to handle any unexpected bills or emergencies.

Cons of long-term car finance

Higher interest

Repaying your loan for longer means you’ll be charged more in interest overall, which means you’ll end up repaying a higher total amount in the long run. It sounds counter-intuitive, but paying less per month for a longer time is usually more expensive than paying more per month for a shorter time.

Pros of short-term car finance

Cheaper overall

Even though you’ll be paying more each month, the fact that the term is shorter means you’ll pay less interest, so the total amount you repay will be lower. This means that shorter contracts are typically cheaper overall than longer ones.

Less risky

Shorter plans are often seen as a safer option because you’re not committing yourself over several years. If you can comfortably manage the higher payments that come with a shorter term, clearing the debt more quickly will put you in a stronger financial position sooner.

Cons of short-term car finance

Bigger monthly commitment

Shorter plans mean higher monthly repayments, which could be an issue if you run into financial difficulties. For instance, if you suddenly lost your job, you would need to find a bigger chunk of money to pay for your car each month.

What’s the right loan length for me?

Deciding on the right loan length for you will depend on a number of things. 

Think about how much you can afford to pay each month - a longer loan term will mean lower repayments, but you’ll end up paying more in total. If you can comfortably afford to pay a bit more each month, then a shorter term will mean you have to pay less interest.

You should also consider how often you like to change your car. If you like to switch it up every couple of years, then you probably don’t want to go for a really long car finance agreement. On the other hand, if you’d like your car to be part of the family for years to come, then a longer contract might suit you.

It’s worth remembering that if your circumstances change and your car finance deal isn’t a good fit for you anymore, you can apply to refinance it and change your term length and/or monthly repayments.

How can I calculate car finance repayments?

Figuring out how much you’ll actually repay each month isn’t always as straightforward as you’d think, but lucky for you, we’ve got you covered. Our car finance calculator will help you get an idea of how much you’re likely to pay - just pop in the amount you want to borrow, how long you want to borrow it for (taking into account everything we’ve just discussed), and a few details about your credit score. Then let the calculator work its magic! 

Full disclosure - the numbers the calculator gives you are just an example (although to be clear, they are based in mathematics rather than actual magic). They’re not a quote or an offer, and they’re subject to change, but should still hopefully help you get an idea of what to expect.