Rising Interest Rates Slow the Rush Toward Long-Term Loans

Two quarters don’t quite make a trend, but rising interest rates appear at least to be putting the brakes on a long-running trend toward longer and longer loan terms.

Borrowers are chasing shorter terms and lower interest costs, instead of longer terms and more affordable monthly payments.

Today, borrowers who can afford those higher monthly payments are more likely  to choose a 48-month loan instead of 72 or 84 months, according to the Experian Automotive State of the Automotive Finance Market for the first quarter of 2023. The report was published June 1.

“The shorter-term rates for new vehicles are lower. They’re definitely lower,” Melinda Zabritski, senior director, product management for Experian Automotive, tells Wards.

That’s partly because longer-term rates are riskier for lenders and are priced accordingly. It’s also partly because some automakers have put low-interest-rate incentives behind 48-month loans, Zabritski says.

Overall, the average interest rate for a new-vehicle loan was 6.58% in Q1 2023, up from 4.1% a year ago, the report says.

Experian says that for 73- to 84-month loans, the average new-vehicle interest rate was 8.1% in Q1 2023. For 48-month auto loans, it was 3.55%.

The average new-vehicle loan term in Q1 2023 was about 68.6 months. That’s down from about 69.5 months a year ago, Experian says, and down vs. fourth-quarter 2022. In Q4 2022, the average term was about 69.4 months, down slightly from 69.7 months in Q3 2022. That’s two consecutive quarters of lower terms compared with the preceding quarter.

Zabritski says the average term has had some ups and downs in recent history, even though the overall trend has been toward longer terms. Therefore, the decline in the average term in the first quarter isn’t as rare as it seems, she says.

In 2020, for instance, some automakers offered incentives that briefly lowered the average auto-loan interest rate, Zabritski says. Some manufacturers have begun to do the same now.

Meanwhile, the share of 73- to 84-month auto loan terms in the first quarter of 2023 was 31.6%, down from 35.6% a year earlier.

Zabritski says in the report, “Oftentimes when consumers shop for a vehicle, the main priority is securing a low monthly payment, but it’s also important to assess the total cost of the loan, particularly amid rising interest rates and vehicle prices.”