Car buyers are flocking to loans more than five years long in search of lower monthly payments or more vehicle for the same payment.
The average term on a new-vehicle loan reached a record 65 months in the fourth quarter of 2012, up from 63 months a year earlier, according to Experian Automotive. Loans of 73 to 84 months showed the biggest increase as a percent of retail auto loans, followed by loans of 61 to 72 months. Shorter-term loans lost share, the company said.
Power Information Network also has marked the trend to longer loans. The company reported that in March, auto loans of 72 months or longer accounted for 30.4 percent of retail new-vehicle volume. That was flat vs. a year ago, and down only slightly from a record 30.6 percent in September 2012.
"Seventy-two-month loans allow customers to achieve lower payments that fit their household budgets," said Deirdre Borrego, vice president in charge of the Power Information Network.
Analysts say long-term loans cut both ways for auto retailers and lenders.
On the plus side, lower payments encourage higher vehicle sales. And longer term loans help offset a general decline in manufacturer incentives.
On the minus side, longer term loans are a concern because late in the loan, customers are more likely to have a greater amount to pay off on their old loan when they're ready to trade-in. And that can put them in a negative equity position -- owing more on the trade-in than the vehicle is worth. Negative equity makes it harder for customers to finance the next vehicle because the amount owing on the trade-in is usually added to the amount financed in the new-vehicle loan.
Along the same lines, a longer term loan represents a greater risk for lenders, too. If a customer defaults, the severity of the loss increases depending on how much the customer owes vs. the value of the vehicle.
Borrego of J.D. Power said there are a couple of factors that lower the potential negative impact of longer term loans. First, interest rates are low. That lowers the penalty in interest paid for choosing a longer term loan, she said. In addition, used-vehicle values are still high by historical standards even if they're down from recent peaks. That has helped offset the likelihood of negative equity, she said.
Experian Automotive data show that the average amount financed on a new vehicle in the fourth quarter of 2012 was $26,691. The average rate for a prime-risk, new-vehicle customer was 4.2 percent.
Plugging those numbers into an auto loan calculator on the Web site bankrate.com, the monthly payment would be about $494 on a 60-month loan vs. $420 for 72 months. At the end of the terms, the 72-month loan would cost an extra $603.
J.D. Power's Borrego said research shows that the growth in loans of 72-plus months is coming from customers considering 60-month loans, so the cost increase is not that great.
"It comes down to the fact that interest rates are very low," Borrego said. "And that's attractive to consumers."
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