Loan terms

Experian Reports: Auto Loan Terms Are Getting Longer

The price of the average new car is increasing. The average monthly payment on a new car loan, however, has barely changed.

How can this math work? Because loan conditions keep getting longer.

Prices are rising faster than payments

The average list price for a new car in America broke the $41,000 mark for the first time last month. It was $41,016, up 7% from June 2020. Yet according to consumer credit reporting firm Experian, the average monthly payment for a new car has only increased by $7 during this period. The percentage of loans granted for 72 months or more has increased.

“Much of this happened as competition increased between lenders and car prices gradually increased,” the official said. the wall street journal Remarks. “Longer payment terms were designed to make vehicles more affordable.”

More new loans, for more new cars

Americans took out new auto loans quickly in 2021 – more new auto loans were taken out in March than in any previous year. We use these loans to buy new cars. Experian reports that “new vehicles represent a larger portion of the total finance market, growing from 38.24% in the first quarter of 2020 to 43.20% in 2021. Meanwhile, finance used has increased from 61.76% to 56.80% over the same period.”

The average car on US roads is now 12.1 years old, so some buyers feel comfortable taking out a 6-year loan. But committing to such a long term carries risks.

Know the risks

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

Buy smart: Know the real cost of financing

Experian did not provide data on the percentage of new interest-free loans. The company noted that “in Q1 2021, subprime issuance fell to 17.75% in Q1 2021 from 30.85% in Q1 2020.”

A long-term loan on a depreciating asset like a car can also leave buyers upside down – owing more than the value of the car. It becomes a risk if they have to sell it. It also means that if the car is destroyed in an accident, the payment from the insurance company might not cover the balance.