Loans of up to seven years are becoming more popular to new-car buyers, but experts are worried.
Loan terms of 73 to 84 months make up 19.5 percent of new-vehicle loans in the second quarter of this year. According to Experian Automotive, it is the fastest growing loan-length category which jumped 25.1 percent last year.
The next shorter category, 61 to 72 months, accounted for 41.7 percent of new-auto loans. It went down 3.2 percent but is still the biggest category.
But while longer loan terms become more popular, shorter terms fall behind. Vehicle loans of 37 to 48 months fell by 2.4 percent in the second quarter. The shortest loan-length range, 25 to 36 months, plummeted by 24.7 percent.
The average loan terms for new cars and used cars are 65 months and 61 months, respectively, both up by 1 month.
There seems to be several factors contributing to the phenomenon: low interest rates, declining delinquency rates, higher used car prices, and old trade-ins.
Vehicles stay on the road for an average of 11 years. But according to automotive pricing information source TrueCar, the average transaction price of new cars is now at $30,592 from $25,703 in 2002.
That means the trade-ins today for new vehicles are worth practically nothing. To make a new-car purchase comfortably possible, people resort to longer auto loans with lower monthly payments.
With the same interest rate, a 48-month auto loan and an 84-month auto loan have thousands of dollars of difference in total cost. But that is an underestimate because long terms carry higher interest rates than short terms.
Bankrate senior financial analyst Greg McBride told USA Today that people are upside down longer than usual when they opt to take out a longer-term auto loan. They repay the loan very slowly while their car depreciates very quickly.
Some auto dealers are concerned about their customers’ preference for lower monthly payments and longer loan terms. But some lenders are confident, noting that a lot of their customers who choose long terms have strong credit and pay off the loans even before reaching seven years.