Long-term car loans are reportedly becoming more common and creating risks for both buyers and sellers.
Six-year loans are now the most common form of new-vehicle financing, accounting for 36.1% of loans in the second quarter, Bloomberg reported Monday (Aug. 25), citing data from Edmunds.com.
Seven-year car loans, which were once rare, made up 21.6% of all new-vehicle financing in the second quarter, while eight-year loans accounted for less than 1% but are growing, according to the report.
The report attributed the growing frequency of long-term loans to the average sale price of new cars, which has risen 28% over the past five years to reach nearly $50,000, the report said.
Long-term car loans create risk for buyers in the form of slow equity building, the potential for owing more on the car than it’s worth when they want to trade it in and paying more interest than they would pay on a shorter-term loan, according to the report.
For car dealers, long-term loans lead to customers keeping their cars longer rather than trading them in, per the report.
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Eight-year car loans first appeared shortly before the Great Recession of 2009 and were avoided by lenders for years after that, Mike Schwartz, vice president of dealer operations at Los Angeles dealership Galpin Motors, said in the report.
“We — dealers, manufacturers, auto lenders — don’t learn our lessons from the past,” Schwartz said. “I’m sure bank presidents back then said, ‘We’re never doing 96-month loans again.’ And here we are, 15 years later, and we’re getting right back into it. It’s crazy.”
Edmunds reported in July that the share of new-vehicle trade-ins that were underwater — meaning they had negative equity — reached a four-year high of 26.6% in the second quarter. In addition, the average amount owed on these loans, $6,754, was near an all-time high.
“Consumers being underwater on their car loans isn’t a new trend,” Edmunds Director of Insights Ivan Drury said in a July 29 press release. “Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan, even if those choices may have felt manageable in years past.”
Used car retailer CarMax said in June that it boosted its provision for loan losses to $101.7 million, up from $81.2 million in the same quarter a year earlier, in part because of loss performance and an uncertain economic outlook.
