When Tucson resident Valerie Vinyard purchased a new car in 2010, she expected to take out a five-year loan, but the dealership presented her with a longer financing option to reduce her monthly payments.
Vinyard opted for a six-year car loan to reduce her payments to about $200 a month, which shaved off $50 to $100 each payment.
“I didn’t know six-year car loans existed,” said Vinyard, a spokeswoman for AAA Arizona. “It’s a nice cushion. If you are at a super low interest rate, it doesn’t really hurt you. I took advantage of it and appreciated it.”
Since the Great Recession, more consumers are signing up for longer car loans. Although the move can lower monthly payments, experts warn it could mean more debt because of interest paid over a longer period of time.
The national average for a new car loan term was 66 months, with a monthly payment of $482 in 2014, according to a report by Experian Automotive.
- The average payments by risk segment on new vehicle loans fell to $352 in 2014, compared to $471 in 2013.
- For used vehicle loans, the average payments fell to $3,555 in 2014, compared to $482 in 2013.
In Arizona, consumers sign up for longer car loans – three months longer than the national average with a monthly payment of $481.
Melinda Zabritski, senior director of Experian Automotive, said a couple of factors have led to longer-term car loans. Consumers are still bouncing back from the Great Recession, while the cost of vehicles has increased.
“The average value (of a vehicle) is up about $2,000 in the past four years,” she said.
Zabritski said this trend likely will continue, with loans falling into the 75-month range.
“But it’s important to not let that bring you into a car you can’t afford,” she said. “If you are a person that only likes to own a car for a couple of years, then a long-term car loan might not be the best thing for you.”
Vinyard said she paid her car loan off early in three years to eliminate debt.
Longer-term loans can be very helpful, but it’s important to understand the risks, she said.
“There are more cons than pros, unless you approach it smartly,” she said. “It’s important as a consumer to enter a long-term agreement with a clear head.”
Loan terms and payments have increased for the used car sector, too.
Since 2010, the national average loan term increased slightly, from 57 months to 62 months for used cars. The average payment increased from $340 to $355, according to Experian.
Chris Kukla, senior vice president of the National Center for Responsible Lending, a nonprofit that advocates for fair lending practices, said auto lending has increased significantly since the Great Recession.
The nonprofit published a report, “The State of Lending in America & its Impact on U.S. Households,” that looked at transparency and regulation in the auto loan industry, as well as the cause of expensive and unsustainable loans for consumers.
“Part of what we are looking at is if there is a bubble in the auto lending industry,” he said. “We’ve been looking at if there are practices in the auto loan industry that are a concern. Certainly lengthening loan terms are a concern.”
Kukla said the nonprofit also has seen significant growth in car loans longer than five years, with loans as long as 84 months.
However, consumers may think they are going to be in the car longer and the cars may not last as long as the loan term, he said.
“Our concern is that we’re seeing a rise in negative equity,” he said. “Consumers are rolling their old loan into a new car loan.”
Longer loans can lead to trouble for consumers, who pay interest longer. That income goes to the car lender, putting people in a cycle of debt, Kukla said.
“There is no greater purchasing power for consumers,” Kukla said. “If people are tied to a longer term loan, they won’t be buying new cars. That can have an impact on the economy and the borrower as well.”