Tom: You join us this morning with some news about auto loans.
Mellody: I do have news, Tom, but it is worrying news. A new report out from Experian tells us that the average term of auto loans – both for new and used car sales – are getting stretched to record lengths. On top of that, the average amount financed for new vehicles, and the average monthly payment for new automobiles, have also hit record highs in the first three months of the year. Combined, these mean that consumers could get themselves in trouble with auto loans, Tom, and our listeners need to be careful if they are considering buying a car.
Tom: How long are these new loans lasting, and how much are consumers paying?
Mellody: Do you remember when the average term of a car loan was 48 months? Well, those days seem to be long gone. The Experian report I mentioned found that the average new-car loan has reached a record 67 months! That over five and a half years! Even more unsettling, the fastest growing segment of new car loans is those with terms lasting between 73 and 84 months.
The percentage of loans with these lengths reached a new high of 29.5 percent in the first quarter of 2015, up from 24.9 percent a year earlier. Long-term loans for used-vehicle loans also broke records, with loan terms of 73 to 84 months making up 16 percent of all used car loans in the first quarter 2015, up from 12.94 percent.
And it is not just the length of loan terms that are exploding. What people pay for cars is also breaking records. The average amount financed for a new vehicle is now $28,711, up from $27,612 a year earlier, and the average monthly payment for new vehicles also rose to $485.
Tom: What forces are behind these longer loans?
Mellody: There are a couple of factors that are contributing to these longer loan terms. First of all, car companies and dealers changed their approach to financing emerging from the great recession. People were holding on to their cars, waiting to feel more secure about their finances before buying a new one.
We saw the average age of cars on the road spike to over 10 years. So to incentivize people, companies started pushing people to spend less money per month, but more over the long run. This has been helped by very low interest rates, which means that borrowing money has been cheap. This has pushed higher income individuals to finance for longer terms.
The second major factor is wages. We all know that wages have stagnated for most workers over the past few decades. The problem? Car prices have not. So, in order for people to be able to afford new cars, the length of auto loans has had to get longer. Combine that with the fact that people want to buy new, more expensive cars and have the same old low monthly payment, and you have a recipe for much longer loan terms.
Tom: What does this mean for people who may want to buy a car?