WASHINGTON — The sharp increase in longer-term auto loans over the last several years carries added risk for car buyers, the Consumer Financial Protection Bureau said in a report Wednesday.
The report said 42% of car loans issued in the last year had a repayment term of six years or more, a huge leap over the 26% of car loans that had longer terms in 2009. Over the same period, five-year loans declined.
Longer-term auto loans “are more expensive and can result in consumers continuing to owe even after they are no longer driving their car,” CFPB Director Richard Cordray said in a press release. “Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan.”
The report, which is derived from lending trends the bureau tracks using data from the credit bureaus, found that consumers with six-year car loans pay considerably more over the life of the loan than those with five-year terms, and experience higher rates of default. Loans six years or longer have had default rates exceeding 8% in recent years, compared with default rates closer to 4% for shorter-term loans.
As an illustration, the CFPB said a borrower with a five-year loan of $20,000, at 5% interest, would have paid nearly $2,200 in interest after three years and have a remaining balance of $8,602.98. But a six-year loan for the same amount and interest rate would have cost $152 more in interest in the same span of time, while leaving a remaining balance that is nearly a quarter higher.
“While longer loan terms may make monthly payments more affordable, it is not clear that consumers are better off taking out longer-term loans or that they will be more likely to successfully repay the loan,” the report said. “Longer-term loans amortize more slowly and, as a result, financing costs will be higher over the life of the loan.”
The CFPB noted that longer-term loans are used more typically by borrowers with lower credit scores. On average, borrowers who take out six-year loans have credit scores of 674 — 39 points below the average credit score for those who take out five-year loans. Meanwhile, the average loan amount for six-year loans of $25,300 was nearly 26% higher than that of five-year loans.
“To the extent that consumers are buying more expensive cars, making smaller down payments, or otherwise financing larger loan amounts, the increased use of these longer-term loans may be a result,” the report said.