Should You Choose a Short-Term or Long-Term Car Loan in NZ?

5-minute read | Updated 21 November 2025

When you’re borrowing money to buy a car, you’ll have a few things to decide on.

Apart from the all-important question of which vehicle you want to buy, you’ll need to work out which lender is an appropriate fit for you, whether you’re putting a deposit down on the purchase, and what kind of repayment you’re comfortable making. For more insights, check out 5 things to know before getting car finance to help you make an informed decision.

You’ll also need to consider the term of your loan.

Choosing whether to pay it back over a short period of time or take a bit longer will make a big difference to what your loan costs and how it might fit into the rest of your financial life.

Here, we’ll look at some of the pros and cons of both opting for a short-term loan and taking a longer one.

What is a short-term car loan?

The length of time that people pay back their car loans can vary a lot.

Typically, a short-term car loan is one that is paid back over one to three years.

When you have a loan over a short period, you’ll pay higher monthly payments, because you have less time to spread the cost of the purchase over.

But you’ll usually pay less interest, and the total cost of borrowing may be less.

The main benefits of a short-term loan are that you’re debt-free faster, you pay less in interest and other costs, and you’ll build up equity in your car more quickly.

Pros

Lower total interest: Because you’re paying back the loan more quickly, there is less time for the interest to accrue.

Say, for example, that you’re borrowing $25,000. Over 18 months, with an interest rate of 10 per cent, this will cost you about $350 a week. You’ll pay a total of just under $2,000 in interest.

If you pay it off over five years, it will only cost you about $120 a week, but it will include $6,800 of interest. (This is a basic calculation to highlight the difference; there may be fees or other charges that affect your repayments.)

Faster equity: As you pay off your loan, you build up your ownership stake in the car. Reducing the loan quickly means the portion increases in size, too. Cars do tend to drop in value over time, so this reduces the risk of owing more than your car is worth.

Cons

Higher repayments: Although you’re saving money on interest, you’ll need to cover higher payments. It may pay to take some time and ensure that your budget can comfortably absorb this.

What is a long-term car loan?

A long-term car loan is one that takes more like four to seven years to pay off.

When you have a loan for a longer term, your payments are generally lower. They can be quite a bit less, as seen in the example above. But because you borrow the money for longer, it means that you usually pay more in interest and have a higher total cost of borrowing.

Pros

More affordable repayments: A longer-term loan will generally have lower repayments, which may fit more easily into your budget.

Potential flexibility: If your payments are low, you may have more flexibility to juggle other financial commitments.

Cons

Higher cost: A longer-term loan will usually be more expensive overall because you pay more interest.

Potential for car’s value to drop: If you’re paying down your loan slowly, and your car drops in value, there’s a chance that there will be points in time where you owe more than what your vehicle is worth.

Interest Rates on Short-Term vs Long-Term Car Loans

You may find that a short-term loan has a lower interest rate because the lender may see it as a lower-risk loan.

The reverse may be true if you need to take longer to clear the loan. The interest rate you are offered will depend on several factors and the lender’s criteria.

How to Choose the Right Car Loan for You

Here are a few things to think about if you’re trying to work out what loan term might be appropriate.

Assess your budget: What kind of repayments can you comfortably afford? This will help you determine how quickly you could feasibly clear your loan.

What are your goals? How will your loan fit into the rest of your financial life? Is managing your cash flow most important, or are you driven to be debt-free as quickly as possible, and want to minimise your interest costs?

Your car’s resale value: Short-term loans can be a suitable option for cars that depreciate quickly, so that you know you won’t be stuck with negative equity. A long-term loan may leave you owing more than the car is worth.

Refinancing: A Flexible Option for Long-Term Loans

If you’ve been paying off your loan for a while but want to make changes, you may have options.

It is often a good idea to approach your lender in the first instance to talk about changes to your loan term or repayments.

If you don’t get the resolution you require, you may consider moving your loan to another lender. Sometimes, you may be able to negotiate a better interest rate or move to a different structure that allows you to clear your debt more quickly.

Choosing the Right Loan Term for Your Financial Future

The right loan term will always depend on your individual financial circumstances, including your goals, budget, and how you like to manage your money.

A short-term loan may save you money in the long run because it will mean a lower interest bill, but a longer-term loan may be easier to manage if you’re worried about cash flow.

When you’re deciding, think about how the loan fits into your life now, and how your circumstances might change in the future.

If you’d like some expert advice, the team at better finance^TM is here to help. We can help answer any questions you may have about personal lending.