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3-Year vs 5-Year Car Loan

Which loan term is cheaper?

About this calculator

A shorter car loan has a higher monthly payment but costs less in total, because you borrow the money for less time and lenders usually charge a lower rate for shorter terms. A longer loan makes the car easier to afford each month, but you pay interest for two more years and, because a new car loses value quickly, you can spend longer owing more than the car is worth. This calculator compares a 36-month loan with a 60-month loan on the same car and shows the interest you would save, the extra you would pay each month, and when each loan stops being underwater.

How to use this calculator

Enter the Vehicle Price, your Down Payment and any Trade-in Value, and the Sales Tax rate. Then enter the APR you are offered for each term, the 36-Month APR and the 60-Month APR; longer terms often carry a slightly higher rate. Under Advanced assumptions you can change the First-Year Depreciation and the Later Yearly Depreciation used to estimate the car's value, and the Investment Return used in the comparison of investing the money you do not pay to the lender. Every result updates as you type, and the inputs are saved in the page address so you can bookmark or share a scenario.

The method

Both loans start from the same amount: the price plus sales tax, minus the down payment and the trade-in. Sales tax is charged on the price after the trade-in credit, as in most states. Each loan is amortized month by month with a fixed payment that repays it over its term. The car's value is estimated by taking the first-year depreciation off the price over the first 12 months and the later rate off the remaining value in each year after that, spread evenly across the months. A loan is underwater while its balance is higher than that value; the calculator reports the first month from which the balance stays at or below it. For the investing comparison, both routes spend the 3-year payment every month for 5 years: on the 3-year route the full payment is invested in years 4 and 5, after the loan is paid off; on the 5-year route the difference between the two payments is invested every month. Investments compound monthly.

Worked example using the default values

A $38,000 car with $3,000 down and 7% sales tax ($2,660) needs a $37,660 loan. At 6.0% over 36 months the payment is $1,146 and the total interest is $3,585. At 6.75% over 60 months the payment is $741 and the interest is $6,817. The 3-year loan saves $3,232 in interest, and the total cost of the car, including tax and interest, is $44,245 instead of $47,477. The trade-off is a payment $404 a month higher. With 20% depreciation in the first year and 15% a year after that, the car is worth an estimated $30,400 after one year and $15,869 after five. The 3-year loan is never underwater, while the 5-year loan owes more than the car is worth until month 17. With no down payment, the 3-year loan is underwater until month 7 and the 5-year loan until month 25. If you invest at 5% a year, the 3-year route ends with $28,855 after 60 months and the 5-year route with $27,502, so the 3-year route comes out $1,353 ahead.

Interpreting the results

The headline is the interest you save by choosing the loan with less total interest, usually the 3-year loan. The proportion bar shows the 5-year loan's interest split into what the 3-year loan would also charge and the extra. The chart plots both balances against the estimated value of the car; where a balance sits above the dashed line, selling or writing off the car would leave you owing money. The investing comparison asks whether the lower payment of the longer loan, invested, could make up for its extra interest. At typical rates it does not, because the investment return would need to beat the loan rate after tax.

Practical tips

Choose the shortest term whose payment fits your budget comfortably, leaving room for insurance, fuel and maintenance. If you take the longer loan for flexibility, you can pay extra each month to finish early; check that the loan has no prepayment penalty. A bigger down payment helps you avoid being underwater, and gap insurance can cover the difference if a car you owe more on than it is worth is totaled. Get quotes from a credit union or bank before visiting the dealer so you can compare the dealer's rate.

Limitations

The car's value is an estimate from two depreciation rates, and real values depend on the model, mileage, condition and the used-car market. The calculator assumes fees such as registration and documentation are paid separately, and it does not include gap insurance, extended warranties or other add-ons that are sometimes rolled into a loan. The investing comparison uses a steady return with no tax or market swings, and it counts dollars at face value without discounting.

Frequently Asked Questions

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