Why Are Auto Loans Getting Longer?


If you’re in the market to buy a new car, you might have recently heard that the norm for auto loans is becoming longer than what used to be a typical five years.

In fact, the average new car loan reached a record 67 months just last year, reports information services company Experian.

If you’re in the market to buy a new car, you might have recently heard that the norm for auto loans is becoming longer than what used to be a typical five years.  The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5 percent in the first quarter of 2015, up from 24.9 percent the year before, they added. In addition, long-term used-vehicle loans are also at a record high, with loan terms of 73 to 84 months reaching 16 percent in the first quarter of 2015, up from 12.94 percent the prior year.

So what’s the deal? Why is this happening? And is this a good or bad thing?

Experian Senior Director of Automotive Finance Melinda Zabritski says consumers can actually benefit from a longer auto loan.

“While longer-term loans are growing, they do not necessarily represent an ominous sign for the market,” Zabritski says. “Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.”

But that doesn’t necessarily mean you should just lock into a longer auto loan so that you can save some dough each month.

“It is critical for consumers to understand that if they take a long-term loan, they need to keep the car longer or could face negative equity should they choose to trade it in after only a few years,” Zabritski says.

“While lower monthly payments may seem appealing, the interest rate you pay will likely be higher than if you had a shorter loan,” adds personal finance writer Chris Horymski. “You will also pay more for the car over the life of the loan. And when the time comes to sell your car, the value of the car will have fallen more than if you had paid off the loan earlier and sold the car.

According to the June 2015 report by Experian, the average amount financed for a new vehicle hit $28,711 in the first three months of the year, a record high, up from $27,612 the prior year. The average monthly payment for new vehicles also increased to $485 in the quarter ended March 31, up from $474.

One aspect that’s driving the trend of long-term auto loans is the actual cars themselves.

“Consumers are demanding a lot more technology in their vehicles — infotainment technologies,” says AutoPacific Analyst Ed Kim. “There’s also a lot more safety features [and] emissions and efficiency technologies in vehicles right now that are making vehicles cost a lot more.”

If you need an auto loan, we have the tools to help. Call or contact us today.

 

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