Consumers Opt for Lower Term Loans With Higher Payments

High interest rates are driving trends in consumer auto loans, according to Experian Automotive.

 F&I managers may find that with interest rates so high, the tried-and-true tactic of shifting borrowers to lengthier loans to get a lower monthly payment may backfire. It sounds contrary, but buyers may save with shorter terms and higher monthly payments, if they qualify for lower, incentivized interest rates.

To reduce the amount spent on interest, borrowers with good credit scores are taking out loans with shorter terms and higher monthly payments, says Melinda Zabritski, Experian’s head of automotive financial insights.

In return, those well-qualified borrowers get lower interest rates, which are likely subvented by the auto manufacturers and their captive finance companies, she tells WardsAuto.

“For consumers who can afford it, especially on new vehicles, you’re seeing those lower rates,” Zabritski says.

According to Experian's “State of the Automotive Finance Market Report,” for the fourth quarter of 2023, the shortest loan terms offer the lowest average new-vehicle loan rates, and shorter-term loans correlate with higher credit scores.

The average amount financed for the fourth quarter of 2023 decreased after spiking the past couple of years.

For the average new-vehicle loan in the fourth quarter of 2023, the amount financed was $40,366. That’s down $1,143, or about 2.8%, vs. the same quarter a year earlier.

In the fourth quarter of 2022, it was up $1,475, or 3.7%. In 2021, the average amount financed was up a substantial $4,596, or 13%, vs. the prior year.

However, because of higher interest rates overall, the average monthly payment in the fourth quarter of 2023 increased slightly to $738, up from $720.

The average new-vehicle loan rate was about 7.2% for the fourth quarter of 2023, up from about 6.1% prior-year. In the fourth quarter of 2021, it was about 3.9%.

Using an online auto loan calculator at Credit Karma, borrowers financing an amount based on the average amount financed spend around $3,200 on interest at 4.2% for 48 months, with a monthly payment of $825. That compares with more than $8,000 in interest, at 7.2% for 68 months, at $653 per month.

Zabritski says, “With interest rates remaining at elevated levels, it’s natural to see consumers continue to opt for shorter-term loans.”