What does "Loan Term" mean?

When you shop for a vehicle, you have a few choices. You can pay for your vehicle in cash, or you can finance the purchase, or lease. If you've decided to finance, you'll hear the phrase "loan term". If you'd like to learn what this means, read on.

A loan "term" is the amount of time you agree to take to pay back a loan. When financing a vehicle, you can choose to repay the finance company a set amount each month until the loan is paid in full. Your term is the number of months you determine you will need to repay the loan. Loan terms are most commonly offered with the option of 36 months, 48 months, 60 months and 72 months. There are other options, but these are the most common.

When you choose a shorter loan term, your monthly payment will be higher (sometimes even significantly higher). This is due to simple math. You have less time to pay off the loan so your payments will need to be higher. There is a benefit to accepting a higher payment and shorter term...usually, interest rates are lower for shorter term loans.

Here is a real example of how terms can affect your payments:
  • Imagine you found your dream car for $30,000 and put $5000 down. You'd need a $25,000 loan. If you get a 4.5% interest rate and six-year term instead of a five-year term, you’ll pay $69 more per month with the shorter-loan term.
In this scenario, you have a lower payment by choosing the six-year term, but...this means you have to pay another 12 months of interest, too. Using 4.5% as our interest rate, that means by choosing the longer term loan, you'll end up paying an extra $608 for your car.

It's a common practice with lending institutions to charge a charge interest rate for longer term loans. So in our example, you'll not only be paying interest for a longer time, you'll be paying a higher rate than if you chose a shorter term.

Consider your budget and financial situation when deciding which term length is the best fit for you. To save on the total you'll invest in your new car, you may want to choose a shorter loan term loan if you can afford the higher payments. This will also help lessen the likelihood of ending up in a negative equity situation! The SVG Chevy website features a great payment calculator for every vehicle in our inventory. To check it out, click here and adjust the numbers in the payment calculator on the right hand side of the page.