According to the latest report by the Consumer Financial Protection Bureau (CFPB), long-term auto loans are on the rise. The CFPB’s data finds that 42 percent of auto loans made in the last year carried a payback term of six years or more, compared to just 26 percent in 2009.
The growth of the six-year loan has come at the expense of the decline of the five-year loan, which has shrank while its longer cousin has expanded. The CFPB says this is a problem, since six-year loans carry a higher risk because they cost more over time and are generally used by consumers with lower credit scores. As a result, the CFPB notes, they have a higher rate of default.
“The move to longer-term auto loans is opening up more risk for consumers,” said CFPB Director Richard Cordray. “These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car. Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan.”
Auto lending is the nation’s third largest debt category, trailing only mortgage payments and student debt. As of today, there are around 100 million auto loans outstanding in the U.S. — with a total value north of $1 trillion. More than 90 percent of American households have a vehicle, and consumers obtain financing to purchase 86 percent of new vehicles and 53 percent of used vehicles.
Apart from being greater risk and pitched toward lower credit-having consumers, longer-term auto loans tend to be for larger amounts: The average loan amount for a six-year loan was $25,300, compared to $20,100 for a five-year loan. They also have a higher rate of default with a rate that exceeds 8 percent, whereas shorter-term loans have had default rates closer to 4 percent.
In the United States, the average length of ownership of a vehicle is approximately 6.5 years.