As Vehicle Prices Rise, So Do Loan Lengths
Car consumers typically stretch loans to lower monthly payments. Even so, borrowers can fall behind, TransUnion says.
Auto loans beyond five years have become increasingly popular as car prices rise, according to a TransUnion report.
Extended auto loan terms between 72 and 84 months have more than doubled between 2010 and 2015.
Stretching the loans typically is done to lower monthly payments. Even so, borrowers still can fall behind. TransUnion says smaller payments from longer terms did not decrease lenders’ credit risk in the $1 trillion auto-lending industry.
For example, consumers with longer term auto loans (60+ months) were found more likely to be seriously delinquent (past 60 days), according to TransUnion.
The average vehicle loan in the third quarter of last year was $21,368 compared with $18,008 five years earlier. Yet, average monthly payments have fallen to $398 from $420 for the same periods.
In the last five years, the spread of loan lengths has shifted to longer terms, driven by the growth of 84-month loans. Loans of 73 to 84 months now make up 25% of the auto-lending market.
Loans of 61 to 72 month loans comprise the greatest share (38%). Loans of 49 to 60 months have dropped from nearly 35% in the third quarter of 2010 to just over 20% in the same period of 2015.
TransUnion notes that as financing amounts increase, so do longer terms. The average loan length for vehicles over $35,000 is 72 months; 48 months for vehicles under $10,000.
Consumers don’t always keep stretched-out loans to completion of their term. Loan durations have decreased by one month as a result of re-financing due to low rates or consumers selling cars before the loan payoff.
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