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Tuesday 22 August 2017
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Car Buyers Opting For Longer Loans

Car Buyers Opting For Longer Loans

Longer Car LoansMore car buyers are opting for longer loans as they look to lower monthly payments, and not just new-vehicle buyers, either.

Lengthening of used-car loan terms “has been significant,” says Tom Webb, chief economist for Manheim Consulting in Atlanta.

“Some people already think it’s a bubble,” he says of the trend toward longer auto loans. “I think it’s a bubble in the early stages of formation.”

Which means that for now, he says, consumer negative equity spawned by long loan terms poses no immediate threat to auto sales or finance.

Melinda Zabritski, senior director of automotive credit for Experian Automotive, separately has expressed some concern about longer terms increasing negative equity. In interviews late last year, several automakers said they would prefer to avoid the longest-term loans – to avoid negative equity, and to have customers come back more often for a new vehicle.

Auto loans with terms of 73 to 84 months accounted for 19.5 percent of new-vehicle loans and 11.3 percent of used-vehicle loans originated in the first quarter, according to Experian. That was the highest first-quarter share for the range since Experian started keeping track in 2008.

Loans of 61 to 84 months made up 63 percent of new-vehicle loans and 49 percent of used-vehicle loans in the first quarter, Experian says.

The average term for new-vehicle loans in the quarter was 65 months; the average term for used-vehicle loans was 60 months.

In the long run, long-term loans raise the risk that consumers will owe more than their cars are worth at trade-in time. That makes it harder to finance the next purchase.

For lenders, the same scenario can mean bigger losses on repossessions, Webb says. “It does not necessarily increase the frequency of a loss. However, it will increase the severity,” he says.

For now, strong used-car prices help offset the problems of negative equity and smaller recoveries from repossessions. Webb says used-car prices are softening because the supply of late-model used cars has largely recovered from the last recession.




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