Experian Reports: Auto Loan Terms Getting Longer

By Sean Tucker 07/19/2021 7:47am

Buying a car without a titleThe price of the average new car is going up. The average monthly payment on a new car loan, though, has barely changed.

How can that math work? Because loan terms keep getting longer.

Prices Growing Faster Than Payments

The average list price for a new car in America crossed the $41,000 mark for the first time last month. It sat at $41,016 – 7 percent higher than in June 2020. Yet, consumer credit reporting company Experian reports, the average monthly payment for a new car increased by only $7 in that time. The percentage of loans extended for 72 months or longer, meanwhile, has grown.

“Much of that happened as competition grew among lenders and as car prices gradually increased,” the Wall Street Journal notes. “Longer payment terms were designed to make vehicles look more affordable.”

More New Loans, for More New Cars

Americans have taken out new car loans rapidly in 2021 – more new car loans originated in March than in any prior year. We’re using those loans to buy brand-new cars. Experian reports, “new vehicles represent a larger portion of the total finance market, increasing from 38.24 percent in Q1 2020 to 43.20 percent in 2021. Meanwhile, used financing decreased from 61.76 percent to 56.80 percent in the same period.”

The average car on American roads is now 12.1 years old, making some shoppers feel comfortable taking on a 6-year loan. But there are risks involved in committing to such a long term.

Know the Risks

For one thing, you’ll pay more over time. Unless you’re financing at zero percent interest, agreeing to make more payments over a longer time increases the amount you’ll pay in interest.

Shop Smart: Know the True Cost of Financing

Experian didn’t provide data on the percentage of new loans that came interest-free. The company did note that “In Q1 2021, subprime originations dropped to 17.75 percent in Q1 2021, down from 30.85 percent in Q1 2020.”

A long-term loan on a depreciating asset like a car can also leave buyers upside down – owing more than the car is worth. That becomes a risk if they should need to sell it. It also means that if the car is totaled in an accident, the insurance company payout might not cover the balance.