Car shoppers are focusing on low monthly payments, and that means longer loans. Consumer Financial Protection Bureau came to that dark conclusion in a new report. I say dark, because this trend could spell trouble for individual households, dealerships, automakers, and lenders.
By looking only at the monthly payment amount, shoppers actually end up paying more for the same vehicle. It’s a short-sighted way to manage money. CFPB also noted that these longer loans have higher default rates. Is that because people who want to stretch out loans are less financially responsible, or do the longer loans provide more opportunities for default?
Just how much long-term auto loans have increased is shocking. CFPB found that in 2009, only 26 percent of loans had a term of six years or longer. In 2017, that rose to 42 percent. That means close to half of all people with new car loans this year will be paying off their vehicle in 2023, if not later, if they take the entire term to pay off the loan. Terms of seven or more years have been increasing steadily, which is just amazing.
At the same time, five-year loans which used to be the industry standard, are decreasing in popularity. Loans that last under three years are also on the decline.
CFPB concluded that low credit scores are fueling this trend.