Delinquencies rise with longer car-loan terms

Drivers who opt for longer car-loan terms are more likely to be seriously delinquent than those with shorter loans.

A new study by TransUnion revealed that, even though the terms of auto loans have increased — most likely as a way to reduce the monthly payment — borrowers are not staying in the loans for the full term. Instead, they often refinance them (due to the current low interest rates on car loans).

“Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” says Jason Laky, senior vice president and automotive business leader for TransUnion. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier.”

TransUnion found that:

• The average length for a new car loan went from 62 months in 2010 to 67 months in 2015.
• In the 3rd quarter of 2015, 7 out of 10 new car loans had terms longer than 60 months, while in 2010, only half of all loans were longer than 60 months.
• Very long car loans more than doubled: 25% of all loans from Q3 2015 were between 73 and 84 months, whereas they were 10% in Q3 2010.

As a result of the longer loan terms, the average car loan payment was $398 per month in Q3 2015, compared to $420 per month in Q3 2010, even though the average loan amount increased by $3,360 during the same time period.

Among subprime borrowers, those with worse-than-average credit, the study found that:

• 30.7% of borrowers with loans ranging from 73 to 84 months were 60 days or more behind on their payments.
• 22.8% of borrowers with 61-72 month loans were that late and 22.4%.
• 49-60 month loan terms experienced the same issues with being late.

Tara Baukus Mello writes the cars blog as well as the weekly Driving for Dollars column, providing both practical financial advice for consumers as well as insight into the latest developments in the automotive world. Follow her on Facebook here or on Twitter @SheDrives.