Low interest rates and reduced monthly payments are making multi-year auto loans more and more attractive to consumers.
And lenders — from auto dealers to manufacturers to banks and credit unions — willing to finance a vehicle over five years or more are no longer the exception, but the rule.
According to the credit rating agency Experian, car loans now run 65 months, or nearly five-and-a-half years, on average. That compares with 59.3 months in 2002. The Experian report also notes that the average new car loan rose to $26,691 in the fourth quarter of 2012, up $272 from the same period the previous year.
The upshot? Consumers are buying more expensive vehicles, but the rise of extended loan terms means lower monthly payments, says Ronald Montoya, consumer advice editor of Edmunds.com, which monitors the auto industry.
“The days of four-year loans are rare,” Montoya said. “Consumers are getting more and more focused on monthly payments and getting into a loan cheap.”
But is stretching out a car loan really a smart financial move? It depends. Rex Rollo, America First Credit Union executive vice president and chief financial officer, says he personally would not take out a longer auto loan.
“I’m of an age where,(for) the car I buy, I have the capacity to make the payments and I certainly want to pay the principal down as rapidly as I can so when I sell the car I have more value,” Rollo says. “But for someone younger who is worried about the amount of the payment, (a longer loan) can be used as a vehicle to get them into the car that they need.”
Rollo says America First, which processed $60 million in auto loans in July, and lenders, when evaluating a customer’s loan, generally look at 5 C’s: collateral, credit, capacity, capital and conditions. But consumers are certainly looking out for their own interest when considering auto financing.
“(Credit union) members will say, ‘I can make this type of a payment and the term may be longer so the payment is reduced, but I know I’m going to trade the car in,’ so it’s more a preference to the member and what their payment capacity is,” Rollo says.