As Car Prices Get Higher, Auto Loans Get Longer, And Longer — And Longer

Borrowers are trying hard as ever, to offset record high prices for new vehicles, by spreading their loans over longer terms.

A longer term produces a lower monthly payment compared with the same amount over a shorter term.

According to Experian Automotive, which recently reported detailed auto finance results for the fourth quarter of 2021, auto loan terms of 73 to 84 months accounted for 33.1% of new-vehicle loans, up from 30.1% a year earlier. That’s a big change, in only one year. Two years ago, it was 29.7%.

How long is an 84-month loan? The last payment would be in 2029.

The problem is, prices have gone up so much due to low supply and high demand, plus the trend towards bigger and more expensive trucks, that the average monthly payment has increased, longer terms notwithstanding.

The average new vehicle loan amount increased 12% year-over-year, to $39,721 in Q4 2022, from $35,421 in Q4 2020, Experian said.

In Q4 2021, the average monthly payment for new vehicles reached $644, up 11%, while the average used vehicle monthly payment was $488, up 17%.

Longer terms also carry a couple of downsides for the borrower. First, in return for a lower monthly payment, assuming the same interest rate, the borrower pays more interest over the life of the loan.

The second downside is that a longer loan term increases how long it takes for the borrower to reach “positive equity.” That’s the point at which the used vehicle is worth more than the remaining balance on the loan.

At that point, the borrower can sell their vehicle, pay off the old loan, and pocket the money; or more likely, apply the value of their trade-in towards another new car.

The opposite is to be “upside-down.” That’s when the trade-in is worth less than the remaining balance on the loan. What often happens then, is that the borrower “rolls over” what they still owe on the old vehicle, adding that amount to the loan for the new vehicle. 

That may be OK for borrowers with good credit. On average, auto lenders are limiting the longest loans for borrowers with the best credit histories. But for borrowers with worse credit histories, who already pay higher interest rates, “rolling over” a whole series of auto loans can mean that the old debt never does get paid off, according to the Consumer Financial Protection Bureau.