Longer-term auto loans growing amid overall lending slowdown

While overall auto lending is pumping the brakes after a period of rapid increase earlier this decade, more consumers are seeking out longer-term financing for automobiles to take advantage of cheaper monthly payments, a new report from the Consumer Financial Protection Bureau concludes. Since the longer-term loans cost more, are used by consumers with lower credit scores and track with higher loan default rates, this is risky for consumers.

Using longer-term loans means a smaller monthly payment, but it also increases overall costs because of higher financing expenses over the life of the loan. CFPB said the data amassed between 2009 and 2017, using a sample of about 5 million credit records, suggest that the growth in longer-term loans has reduced the growth in monthly payments made by borrowers.

The share of loans with terms of six years or more increased from 26 percent of all auto loans originated in 2009 to 42 percent in 2017. Six-year auto loans have become the most common terms used in auto financing, while loans of seven years or longer have also increased in popularity. Five-year loans, formerly the most common type, have also dropped during that time, while loans with terms below five years have generally held steady.

CFPB said the use of longer-term loans tracks closely with lower credit scores from borrowers. The average credit score for borrowers with six-year loans, it said, was 674, which was 39 points below the average for borrowers with five-year loans. Longer-term loans also are more popular in financing larger amounts: The average original loan amount on five-year loans was $20,100, compared to $25,300 for a six-year loan.

Average loan amounts have risen 16 percent, from $18,179 in 2009 to $21,088. That's slightly higher than the 12-percent inflation rate over the same period and well above the 7-percent increase in monthly payments.

The agency also found higher default rates associated with six-year loans between 2009 and 2015 but cautioned that it should not be considered a causal relationship.

"The move to longer-term auto loans is opening up more risk for consumers," CFPB Director Richard Cordray said in a release. "These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car. Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan."

CFPB says auto loans are the third largest category of household debt for Americans, behind mortgages and student loans. About 100 million auto loans totaling more than $1 trillion are currently outstanding.

Related Video:

Longer-term auto loans growing amid overall lending slowdown originally appeared on Autoblog on Mon, 06 Nov 2017 13:00:00 EST.