Long-Term Auto Loans Continue to Rise

By Brendan Moore

04.09.2007

The Consumers Bankers Association (the CBA) released a new report last month that stated that consumer auto installment loans in the United States continue to get longer and longer. As we noted in a column last year, consumers are increasingly opting for longer term auto loans in order to get the monthly payments they want on increasingly expensive cars and trucks. The CBA report notes that this situation is only becoming worse with the percentage of 72-month or greater installment new-car loans now up to 17% of the total new-car loans outstanding, compared to 7% of the total new-car loans outstanding in 2005.

There was a similar increase in 72-month or greater installment auto loan activity for used car loans for these same time periods.

In 1999, only 21 percent of new-vehicle loans were longer than 60 months, the Consumer Bankers Association says. The trend looks unstoppable with many lenders now offering 84-month loans for those who want even longer-term loans, and many of those same lenders considering adding 96-month loans to their product lineup. These terms are for both new car loans and used car loans.

What does this mean in practical terms for consumers? Here’s an example: A $20,000 vehicle loan at 7.55 percent simple interest for 48 months costs the buyer $7,025 in interest. The same loan, carried over 84 months, at the same rate, costs $13,871 in interest. You can do the math – that’s almost twice as much in finance costs. That’s if you can get your lender to give you the same rate for 84 months as 48 months, which would be unusual. They’re probably going to want a higher rate at that long a term. And at 15,000 (average annual miles in the U.S.) miles a year, that means you have 105,000 miles on the car when you finish paying it off at 84 months (7 years x 15,000 miles), so then it’s probably time to buy a new car.

As we noted in a post titled Maybe You Should Lease Your Next Car in 2006 (Archives, Nov 2006 - to your right), there are millions of people in the United States that are getting extended-term loans simply so they can afford the monthly payments on what they want to drive. The preceding example illustrated that there is very little to no equity in the vehicle at any point during the extended loan term and if the loan goes to full term, then the car is almost without any value by the end of the loan term. These types of borrowers are people that really need to take a long look at being lessees instead – it would be far better to lease the vehicles in question from a financial standpoint for most of them.

And just because we can, we’ll list the big vehicle finance outfits: according to AutoCount, an Experian subsidiary, the top ten auto finance (loan and/or lease) companies in 2006 were:

GMAC
Ford Motor Credit N.A.
Toyota Financial Services
DaimlerChrysler Financial Services
American Honda Finance
Chase Auto Finance
Nissan Infiniti Financial Services
WFS Financial
Wells Fargo Auto Finance
CitiFinancial Auto

Lastly, we’ll leave you with this: new car affordability is important to consumers and therefore to car companies, auto dealers, and banks. Comerica Bank out of Detroit says that, as of fourth-quarter 2006, it takes 23.6 weeks of average family income to purchase an average-priced new vehicle. That is a decline of almost two weeks from the average amount of time it took in 2005. The affordability index is based on an average cost of $26,500, which includes the loan finance charges accrued on such a purchase. This amount is down approximately 5% from 2005. Conversely, average family income has increased approximately 5% in this same period. Paradoxically, all of these factors contributed to a new car being easier to buy this year.

So, why are consumers going for increasingly longer terms? Even though there has been a decline in the amount of time it takes the average household to earn the money required to buy a new car, that same household is spending more of its same aggregate income on a higher volume of goods; i.e., flat-screen TVs, iPods, vacations, etc. Therefore, the average household is able to allocate less of a percentage of their total household income towards monthly car payments.

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