Loan terms lasting six to seven years accounted for nearly 30 percent of all new-vehicle loans again last quarter, making them the second most popular option among borrowers.
Longer loans keep consumers’ monthly payments low, but at some point, terms will cap, and 84 months could be the widely accepted limit, Experian Automotive says.
Terms of 73 to 84 months made up 29 percent of new-vehicle loans in the fourth quarter, a 12 percent climb year over year, Experian said in part 2 of its Fourth Quarter 2015 State of the Automotive Finance Market report released last week.
Indeed, loans of 73 to 84 months hovered near 30 percent throughout 2015, accounting for 29.5 percent of new-vehicle loans in the first quarter, 28.8 percent in the second and 27.5 percent in the third.
At some point, “there will be a cap on term,” Melinda Zabritski, Experian’s senior director of financial solutions, told Automotive News. Time will tell what that cap will be and when it will take effect, but Zabritski doesn’t expect lenders on the whole to go beyond 84-month loans. “There are a few, but they are rare,” she said.
Longer loans aren’t the only way dealers and lenders can keep consumers’ monthly payments low. They can also achieve that by factoring in a larger down payment. But that has the risk of reducing vehicle sales, Zabritski said.
Longer loan terms require consumers to own vehicles longer to earn equity, Zabritski said. Still, today’s longer warranties might motivate borrowers to see their loans through. “When the cost of ownership is reduced and the car is more reliable, consumers are more likely to make payments,” she said.
However, if a consumer with a seven-year loan were to trade in before term end, say, at five years, the consumer would be upside down, Zabritski said, and if the loan became delinquent, there would be a greater loss to the lender.
Trade-ins with a lower value “will impact consumers negatively,” Zabritski said. And for lenders, too, “if the loan goes bad, the car is worthless.”
Still, new-vehicle loans of 61 to 72 months made up the largest share in the fourth quarter at 42 percent, up 5 percent year over year. The average new-vehicle loan term in the fourth quarter was 67 months, a one-month increase year over year. The used-vehicle loan term also extended one month to 63.