Car Loan Terms: 3, 5, or 7 Years?

The term (length) of your car loan has a big impact on your repayments and total cost. A longer term means smaller repayments — but you'll pay more interest overall. So what's the right balance?

How Loan Term Affects Your Repayments

Let's look at a $35,000 loan at 7.5% interest:

The difference is stark: a 7-year loan costs $5,904 more in interest than a 3-year loan — but the monthly payment is half.

Short Term Loans (1-3 Years)

Pros

• Pay less interest overall — significantly less total cost
• Own the car outright faster — freedom to sell or modify sooner
• Less risk of negative equity — you're paying down faster than depreciation
• Often slightly better rates — some lenders offer lower rates for shorter terms

Cons

• Higher monthly repayments — significant impact on cash flow
• Less flexibility — harder to absorb unexpected expenses
• May limit what you can afford — smaller borrowing capacity

Best For

Buyers who can comfortably afford higher repayments and want to minimise total cost.

Medium Term Loans (4-5 Years)

Pros

• Balance of affordability and cost — reasonable repayments, reasonable interest
• Most popular choice — the standard for good reason
• Aligns with warranty period — many new car warranties run 5 years
• Manageable depreciation gap — less risk of being underwater

Cons

• More interest than short term — you will pay more overall
• Car aging as loan ends — might want to upgrade as you finish paying

Best For

Most buyers — it's the sweet spot for balancing repayment comfort and total cost.

Long Term Loans (6-7 Years)

Pros

• Lowest monthly repayments — maximum cash flow flexibility
• Can afford a more expensive car — higher borrowing capacity
• Easier to budget — smaller impact on monthly expenses

Cons

• Pay significantly more interest — thousands extra over the loan
• Higher risk of negative equity — car depreciates faster than you pay down
• Car may need major repairs — older cars cost more to maintain
• Locked in longer — circumstances may change over 7 years

Best For

Buyers who need to minimise monthly outgoings, but should go in with eyes open about the extra cost.

The Negative Equity Problem

With longer loans, there's a real risk of owing more than the car is worth. This is called negative equity or being "underwater."

Here's how it can happen:

Shorter loans reduce this risk because you're paying down the loan faster than the car loses value.

What Term Should You Choose?

Choose 3 Years If:

• You can comfortably afford the higher repayments
• You hate paying more interest than necessary
• You want to own the car outright quickly

Choose 5 Years If:

• You want a balance of affordability and total cost
• You're buying a new car with a 5-year warranty
• You're not sure how long you'll keep the car

Choose 7 Years If:

• Monthly cash flow is your priority
• You need the lower repayments to afford the car
• You understand and accept the extra interest cost

A Smarter Approach: Longer Term, Extra Payments

Here's a strategy that gives you the best of both worlds:

1. Take a 5-7 year loan — locks in manageable required repayments
2. Pay extra when you can — treat it like a shorter loan when cash allows
3. Keep the flexibility — if money gets tight, drop back to minimum

This way, you're not locked into high repayments, but you can still pay it off faster and save interest when finances allow.

Just check your loan allows extra repayments without penalty — most do, but always confirm.

The Bottom Line

Choose the shortest term you can comfortably afford. "Comfortably" is key — don't stretch yourself so thin that one unexpected expense causes stress. But don't stretch to 7 years just to buy a more expensive car than you need.

Want to see how different terms affect your repayments? Try our calculator or get a personalised quote.

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