The average loan term has been on a continuous climb. In retrospect, based on vehicle affordability, the rise seems to have been inevitable.
Every quarter for the last two years, new-vehicle loan terms have increased one month on a year-over-year basis.
In the first quarter of 2015, the average new-vehicle loan term was 67 months, according to Experian. The average loan term climbed to 68 months in the first quarter of this year, an all-time high. I won’t be surprised if the average loan period reaches 69 months in the first quarter of 2017.
Dealers and lenders want to get customers into the vehicles they want at a monthly payment they can afford, but a study by Bankrate.com found that a median-income household can’t afford a vehicle at what Kelley Blue Book says is the national-average price of $33,865. Long loan terms have been a popular tool to securing a low monthly payment.
When Bankrate calculated how much a household can spend on a vehicle, it applied the “20-4-10” rule, which means the consumer makes a down payment of at least 20 percent, finances the vehicle no longer than four years and pays principal interest and insurance not exceeding 10 percent of the household’s gross income.
San Jose, Calif., was ranked highest for vehicle affordability in the study. Residents of that city, based on their median income, could afford a purchase price of $32,856, about $1,000 less than Kelley Blue Book’s average vehicle price. At the opposite end of the 50 largest cities ranking, Detroit has the lowest vehicle affordability: residents there can only afford a purchase price of $6,174, with a $120 monthly payment.
Customers’ vehicle affordability illustrates why loan terms have stretched.
Loans of 73 to 84 months made up 30 percent of new-vehicle loans in the fourth quarter last year, marking a 12 percent rise from the year earlier.
Every quarter we report on longer loan terms. Those reports invariably prompt hand-wringing by some readers. But if we take a look in consumers’ wallets, should we really be surprised?