As car prices rise, car loans are getting longer and longer – and longer

Borrowers are trying harder than ever to offset record new vehicle prices by spreading their loans over longer terms.

A longer term produces a lower monthly payment compared to the same amount on a shorter term.

According to Experian Automotive, which recently released detailed auto finance results for the fourth quarter of 2021, auto loan terms of 73 to 84 months accounted for 33.1% of new vehicle loans, up from 30.1% a year earlier. . It’s a big change, in just one year. Two years ago, it was 29.7%.

What is the duration of an 84 month loan? The last payment would be in 2029.

The problem is that prices have risen so much due to low supply and high demand, as well as the tendency to buy larger, more expensive trucks, that the average monthly payment has increased, despite longer terms. long.

Average new vehicle loan size increased 12% year-over-year to $39,721 in the fourth quarter of 2022 from $35,421 in the fourth quarter of 2020, Experian said.

In Q4 2021, the average monthly payment for new vehicles reached $644, up 11%, while the average monthly payment for used vehicles was $488, up 17%.

Longer terms also have some disadvantages for the borrower. First, in exchange for a lower monthly payment, assuming the same interest rate, the borrower pays more interest over the life of the loan.

The second disadvantage is that a longer loan term increases the time it takes for the borrower to reach “positive equity”. This is when the used vehicle is worth more than the remaining loan balance.

At this point, the borrower can sell their vehicle, pay off the old loan and pocket the money; or more likely, apply their trade-in value toward another new car.

The opposite is to be “upside down”. This is when the trade is worth less than the remaining balance on the loan. What often happens then is that the borrower “rolls over” what he still owes on the old vehicle, adding that amount to the loan for the new vehicle.

This may suit borrowers with good credit. On average, auto lenders limit the longest loans to borrowers with the best credit history. But for borrowers with worse credit histories, who are already paying higher interest rates, ‘rolling over’ a whole slew of car loans can mean old debt will never be repaid, according to the Consumer Financial Protection Bureau. .