The latest findings from Experian show that consumers continue to lengthen the terms of their car loan, which is a worrying trend.
New from Experian
At CU Direct’s Drive 2017 conference in Las Vegas, Experian’s Karl Kruppa presented some troubling findings: Auto loan terms continue to lengthen. For example:
- 11.7% of new auto loans were for 73 to 84 months in the first quarter of 2009.
- In the first two months of 2017, this figure skyrocketed to 33.8%.
As Kruppa pointed out, that means the share of new car loans with terms of 73 to 84 months has nearly tripled in the past eight years.
The data also shows that consumers continue to push the boundaries.
- In the fourth quarter of 2010, 17.1% of new vehicle loans had a duration of 84 months.
- By the fourth quarter of 2016, that number had risen to 28.7%.
When it comes to the used car market, things are not much different. Experian data shows that nearly 30% of 2016 model year used vehicles are financed for 73 to 84 months. Although most long-term loans are for cars that are only a few years old, there are also troubling exceptions. For example, 10% of 2010 model year cars are financed for 73 to 84 months, according to Experian.
Six or seven years is a long time to commit to paying for a car.
Concerns about longer car loan terms
This is a dangerous trend in the industry, especially for consumers with less than perfect credit.
Most people turn to longer auto loan terms because it lowers their monthly payment. However, it also increases the amount of interest you ultimately pay.
So, although the monthly payment is lower, the total cost of financing your vehicle is higher. This problem is worse for people with imperfect credit who are unable to qualify for the best interest rates.
In addition to making the loan more expensive, longer car loan terms have other disadvantages:
- You face upside down longer. If you take out a long-term loan, you will have negative equity longer than if you were to finance that same vehicle for a shorter term. When you owe more on the loan than the car is worth, it’s harder to sell, trade-in, or refinance.
- What about repairs? Also, if you opt for a new car, the warranty will end well before the end of the loan term of six or seven years. As for used cars, it is very likely that expensive repairs will be needed somewhere along the line. Worse still, your vehicle could break down completely, which could force you to pay for a car that is no longer running.
- You cannot predict the future. Again, six or seven years is a long time, and there is no way to predict the future. Things in your life are likely to change during this time, which could alter your vehicle’s needs. It might be hard to adjust, as it’s harder to be flexible with a longer-term loan.
The essential
Car buyers should carefully assess their situation before deciding how long to finance their next vehicle, especially if they have bad credit.
If your credit isn’t perfect and you need a car loan, you don’t have to struggle to find financing with the help of Auto Express Credit. Our free service connects car buyers with local car dealerships specializing in financing, making the process of finding financing faster and easier.
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