When JPMorgan Chase & Co. (NYSE: JPM) reported third-quarter results last Friday, the bank’s chief financial officer said on the conference call that JPMorgan would “pull back” on auto loans with repayment periods of 84 months or more. The bank sees more risk from these very long-term auto loans, based on “where we are in the cycle.”
The first-quarter average loan amount for a new car was $30,032, and the average term of a loan was 68 months. And the lower a buyer’s credit score, the longer the average loan term. Borrowers with higher credit scores take shorter term loans, while those with lower credit terms take longer term loans, according to a report from Experian published in August.
The report also noted that the average loan rate on a $30,000 car loan in the first quarter was $4.79%. The advantage to the buyer of a longer term is a lower monthly payment. The disadvantage is that the borrower pays more in interest charges. Here’s a look at how much interest a car buyer pays on a $30,000 loan at 4.79% with the specified term:
- 36 months = $896/month for a total finance charge of $2,267
- 48 months = $688/month for a total finance charge of $3,025
- 60 months = $563/month for a total finance charge of $3,795
- 72 months = $480/month for a total finance charge of $4,577
- 84 months = $421/month for a total finance charge of $5,369
- 96 months = $377/month for a total finance charge of $6,173
As the borrower is paying off the loan, the value of the car depreciates. That means that it takes longer for the borrower to establish any equity in the vehicle. If the borrower defaults on a seven-year or eight-year loan, chances are higher that the car is worth less than the amount remaining to be repaid on the loan.
Even JPMorgan can’t make money on a deal like that, and with record high new car buying, the number of used cars on the market is growing and lowering the value of used cars even more.
It’s no wonder, then, that the bank wants out of the longest-term auto loan business, and it won’t be too surprising if other lenders follow suit.
We looked earlier this year at whether a seven-year or eight-year loan was a reasonable option for a new car buyers and concluded that if the monthly payment on a five-year loan was a little too much for your budget, it might be wiser to look for a cheaper car than to take out a longer term loan. That still appears to be good advice.