CFPB finds increase in long-term auto loans

Inside Subprime: November 3, 2017

By Andrew Tavin

A new report by the Consumer Financial Protection Bureau has found an increase in longer-term auto loans. Specifically, 42 percent of auto loans last year had a payment term of of six years or more, up from 26 percent in 2009.

To clarify, the report is not about title loans. Title loans are subprime loans in which a car you already own is used as collateral. These loans tend to have extremely high interest rates and shorter payment terms, so you’re at a real risk of losing your car. Auto loans, by contrast, are loans given by a lender to help you purchase a new car. 

The CFPB has found that longer-term loans tend to be used by customers with worse credit, and typically have higher rates of default. In fact, auto loans with a term of six years or more have a default rate of 8 percent, compared to the 4 percent default rate of shorter term auto loans. In other words, these longer-term loans have twice the default rate.

This makes sense, given that the CFPB also found that longer-term auto loans come with more risks. One of those risks is greater expense. After all, the longer a loan takes to pay off, the more interest will accrue over time. Even if two loans have similar interest rates, the longer-term loan will be more expensive overall.

This is a problem, because as we noted, these longer-term loans tend to be taken out by customers with lower credit, customers who may already have financial problems and often can’t afford the extra interest they’re signing up for. In fact, the CFPB found that the average credit score of a person who takes out a long-term auto-loan is 39 points lower than the average person who takes out a shorter term loan.

Additionally, many consumers could end up stuck paying off a loan for a car they no longer drive. According to IHS Automotive, car owners only keep their cars for an average of six years, which is actually longer than it used to be. Since the financial crash, Americans have been buying fewer new cars and holding onto them for more time than they used to. Even so, many of these longer-term car loans last much longer than six years, so some cash-strapped consumers may be stuck throwing money every month for a car they don’t even use anymore. 

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