Today's 72-Month Long-Term Auto Loans Aren't Spelling Economic Disaster, Experts Say

Vehicle Costs
FILE - In this Sunday, Sept. 12, 2021, file photo, a pair of unsold 2022 Bolt electric vehicles sit outside a Chevrolet dealership in Englewood, Colo. U.S. new vehicle sales tumbled in September as a global shortage of computer chips worsened, shuttering factories and limiting the selection on dealer lots. David Zalubowski, File/AP Photo

Over the last 18 months, car buyers have become more willing to accept longer loans in order to afford a new car. As the average length of new car loans has been stretched, borrowers are being presented with some of the most favorable terms that the market has experienced in a long time.

Fresh data from LendingTree shows that most auto loans in the U.S. are for 72 months. Sixty-month loans are the second most common length. Financing for 72 months or more currently makes up 43 percent of the business, up five points from 2020 and eight points from five years ago.

According to Dr. Cliff Robb, a professor of consumer science at the University of Wisconsin-Madison, those terms run longer than the average amount of time a driver typically owns a vehicle.

"The general idea is that people - after about five years - do tend to want a new vehicle," he told Newsweek. "And that's what makes these loans so interesting. You're putting yourself into a loan term that actually exceeds the typical ownership term."

Most consumers, he added, go into the buying process thinking that they will drive a car until the wheels fall off. However, outside forces, like the marketing of newer cars or someone close to them buying a new car, often convince owners that they need to purchase a newer car earlier than originally anticipated.

With years of financing still on the dealer's ledger, drivers head to dealership lots looking for a newer car.

"Oftentimes you're in a situation where your loan was more than the vehicle was worth," Robb said. "So when you go to refinance, they're just going to roll whatever was owed into the new loan. So you get even more behind eventually."

Tyson Jominy, vice president of data and analytics at J.D. Power, says that increasingly lengthy auto loans are nothing new. "Extended term financing has been going up our entire lives," he explained to Newsweek.

But what's really changing, he argues, is the way that consumers are approaching auto financing. Before the pandemic, 25 percent of new vehicle purchases were leases. That figure currently sits at 20 percent.

Entering into 60-, 72- and 84-month term loans gives the average buyer lease-level monthly payments with none of the typical lease restrictions like mileage limits.

Today, many auto dealers have less inventory to work with and many are charging premiums on top of the manufacturer's suggested retail price (MSRP). With less negotiation on cars with inflated prices, there's a sense that buyers don't have a lot of options that they can control when making a vehicle purchase.

"Buyers only have one lever they can control in the purchase process: the term," Jominy said. That's what buyers are doing.

Robb says that the circumstance gives way to upselling at dealerships. A customer can stomach more options or a higher trim level if they have access to longer terms and, therefore, lower monthly payments.

Carmakers are noticing the trend as well, shipping high-grade options to dealerships unless alternatives are specially ordered.

He argues that consumers tend to focus on information that's easier to understand when dealing with purchasing a vehicle. In this case, under-educated buyers inherently think that a lower monthly payment is better.

"What we don't always see is the fact that that lower monthly payment means over the life of this auto purchase we're paying a lot more than the vehicle's worth," Robb said. "We're often entering into these contracts where we're already behind in terms of value-to-loan dynamics."

A recent study by Credit Karma showed that 23 percent of respondents regretted a vehicle purchase made during the previous six to eight months. The top two reasons given were that the purchase set them back financially or they were struggling to make the monthly payments.

To Robb and Jominy, that doesn't point to conditions in the auto market, but rather to other factors.

"That just might be pointing to the broader consumer strain right now of rising costs and budget stress," Robb posited.

Jominy agreed, noting that there are far fewer subprime loans and leases being given out right now compared to the time leading up to the 2008 financial crisis.

Subprime loans are usually defined as high-interest loans given to people with bad credit, usually lower than a 600 FICO score. The 2008 crisis kicked off after a wave of subprime loans in the mortgage market went into arrears, causing a chain reaction impacting numerous segments of the economy, including automobile sales.

Proving an effective way of moving stock at the height of the pandemic, those longer terms are here to stay, but Robb says that longer term loans serve as a powerful marketing tool to win and keep a customer.

"I think in the long term [dealers] are going to say, 'wow, this is a great way for us to get more vehicles sold easier,'" Robb said. "It's got all the selling points they love. The payments stay low. They'll refinance it for you later if you want to trade in. So considering all of those things, if the consumer just ignores the costs, it all sounds good."

If you're in the market for a new car, there are pros and cons to 60- and 72-month term (or longer) loans. On the plus side, you can lower your monthly payment. On the negative side, you may end up paying more than the car is worth over the life of the loan. Experts agree that when financing a car, it's important to think about the total cost of the vehicle, insurance and maintenance included, instead of just the initial cost.