Auto consumers taking out longer loans, changing industry
Nov 04, 2013 Philip Burgess
Purchasing a new vehicle is a major event for any consumer. For many, it's the most significant purchase they may ever make. However, many individuals are not able to fund such transactions themselves and are required to use the services of an auto financing company.
Such enterprises have helped Americans obtain the financial support they need to fund auto sales for several decades, and much of that activity has been fairly standard. However, there is reason to believe that the industry could see a significant change in the coming years.
USA Today reported that more car buyers are starting to take out longer loans. It's an interesting dynamic that has proven to be a unique byproduct of the Great Recession. A new group of previously limited consumers are now finding a more firm financial footing, which has allowed them to pursue new car acquisitions. However, with the economy still rebounding, many of these consumers are looking to reduce their monthly payments, which has given rise to longer loan terms.
Long loans dominate market
According to the source, loans lasting between 73 and 84 months are the fastest growing auto finance sector in America. During the last year, the number of these loans has spiked 25.1 percent and now makes up 19.5 percent of all new vehicle lending activity, based on Experian data cited by USA Today.
Also, data indicated loans with terms between 61 and 72 months make up 41.7 percent of the market. That means that the majority of outstanding auto loans feature payment periods greater than 61 months, showing that consumer behavior is indeed shifting.
The source noted that low interest and late payment rates have made lenders more willing to extend credit to consumers they may have avoided during the economic downturn. Also, high premiums for used cars and longer lasting vehicles currently being manufactured have increased the demand for new automobiles across the country.
Whether or not this emerging loan model becomes the standard in the industry is yet to be seen but it certainly appears as if this trend will continue for the foreseeable future. How these loans are interpreted by the Consumer Financial Protection Bureau (CFPB) will also determine how the auto industry moves forward. Bloomberg reported that the CFPB is pressuring banks to review auto loan data, which could indicate the agency is attempting to regulate the sector.