Americans are taking on longer-term auto loans these days, with particularly dramatic recent growth in the over-five-years segment. Is this a healthy trend?
According to credit bureau Experian Automotive, the average automotive loan term has now reached 66 months. The company said that, in the first three months of 2014, average loan terms reached their highest level seen since the company began reporting the data in 2006.
Experian said that loans with terms extending out 73–84 months have grown dramatically, and now make up more than 24% of all new vehicle loan originations. TruService offers financing options up to 75 months if certain criteria are met.
This means that a significant – and growing – number of Americans are now obligating themselves to seven year payback terms on auto loans.
It’s not hard to see why people are doing these super-long-term loans: extending the loan term lowers the monthly payment, allowing people to buy a more expensive vehicle with a monthly payment that would otherwise only allow them to buy a modest vehicle.
However, the way these loans are paid back almost always ensures that the vehicle owner will be “underwater” (or owing more than the car is worth) for the life of the loan. The only way to avoid this is to make a large down-payment.
Of course, the financially smart thing to do is to buy a cheaper car, on better terms. There’s no better feeling than having your car paid off while it’s still new enough to enjoy. But cars have gotten quite expensive – particularly the ones equipped with the sophisticated entertainment, performance and navigation systems people crave.
Given the expensive tastes of today’s car buyers, it seems almost certain that average loan terms will continue increase. To find out what your best term options are for a new or used vehicle, contact a Loan Specialist at 501-225-3636 x 3.