Length of Auto Loans Continue to Grow

More and more consumers are electing to go with a loan length of 73-84 months when they finance their new vehicle. According to Experian, in the first couple months of 2017, 33.8% of new vehicle loans had lengths between 73-84 months. Compare that to 11.7% of new vehicle loans that had length between 73-84 months in the first quarter of 2009. In the last 8 years, the 73-84 month loan segment has grown from 11.7% of the market to 33.8%. Even inside the 73-84 month loan segment, more and more consumers are going for the 84 month loan option.

The benefits to 84 month loan are pretty simple -- lower payments. Dealers are willing to guide customers to the 84 month loan option because they are able to offer their customers a lower payment. This way, dealers are able to get away with offering less of a discount or including more warranties, while still offering customers a lower payment than if they were financing the vehicle for 60 or 72 months.

Unfortunately for the customer, they are left in a bad long term situation. As consumers go with longer loans, their negative equity can really stack up. Let's look at an example. Imagine an individual was purchasing a new vehicle, and they were going to finance $25,000. Below is a graph showing their payoffs at the end of each year of the loan.


Based on a interest rate of 5%, here are the payments on $25,000 for each loan term:

  • 60 Month - $471.78
  • 72 Month - $402.62
  • 84 Month - $353.35

The large differences between the monthly payments are why its so easy for dealers to convince customers to choose the 84 month loan term. But take a look at the payoff amounts after 3 years of payments:

  • 60 Month - $10,753.72
  • 72 Month - $13,433.81
  • 84 Month - $15,343.40

As you can see after 3 years of payments, if you went with the 84 month loan, you would owe $4,589.68 more than if you had chosen the 60 month term. This is a big concern for the auto industry. As vehicles get more expensive, how do they keep vehicles affordable for customers? As more and more customers choose to go with 84 month loans, how are dealers going to handle customers with more and more negative equity?