The average length of car loans has reached 69.3 months, or nearly six years. Among the causes are more expensive cars. Among the dangers is that car values drop enough in six years and are often worth much less than the value of the loan. That can increase the risk people will default.
According to car research and sales company Edmunds:
As car buyers’ appetites for bigger and more expensive vehicles grows, so does their willingness to take longer paying for them, according to a new analysis from Edmunds, the leading car shopping and information platform. The average auto loan length reached an all-time high of 69.3 months in June — up 6.8 percent from five years ago. The average amount buyers financed recorded the biggest uptick for the year, hitting $30,945 (up $631 from May), also leading to the highest monthly payments for the year, now averaging $517 (up from $510 in May).
“Stretching out loan terms to secure a monthly payment they’re comfortable with is becoming buyers’ go-to way to get the cars they want, equipped the way they want them,” said Edmunds Executive Director of Industry Analysis Jessica Caldwell. “It’s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it’s also a sign that consumers are still confident enough in the economy to spend more on their vehicles and commit to paying for them longer.”
Edmunds also finds that the APR dipped just below 5 percent for the first time since February, averaging 4.96 in June. The APR has increased 5.7 percent from a year ago and 13.6 percent from five years ago.
Longer loan terms are among the incentives car companies have used to help stretch the long record of rising monthly and annual car sales. Since sales have slowed, these incentives have become more aggressive. The only factor in favor of the car companies is the extremely low interest rates which have remained at historically low levels for years. The cost of long loans can easily be absorbed by car company financial arms, which can borrow money at rates that are close to zero.
According to the Financial Times, car loan defaults are rising. In February, it reported:
More than a million US consumers have fallen at least two months behind on car loan repayments as the delinquency rate reaches its highest level since 2009, in the latest sign of stress in the $1.1tn market. The proportion of soured car loans showed a 13 per cent increase to 1.44 per cent in 2016, according to data published on Thursday by TransUnion, the US credit bureau with an anonymised database of 220m consumers.
So, longer and longer car loan terms may sell cars but may trigger consequences lenders are not prepared for.