Despite concern that rising interest rates will slow new-car sales, loan term extensions will move the needle quicker on monthly loan payments, Brian Landau, senior vice president and TransUnion’s auto line of business leader, told Auto Finance News.
Auto lenders originated 7.1 million loans through the third quarter of 2018, up 0.5% year over year, TransUnion reported this week, noting that super-prime consumers led the growth. However, originations will likely slow this year.
“There’s general saturation in the market for new-vehicle purchases,” Landau said. Based on second-quarter 2018 data from the Federal Reserve, the average vehicle financed is $30,000, the average APR is 6%, and the average term is around 66 months, which translates to a monthly payment of about $530, Landau said.
“If I take those stats and flex the APR — raise it 25 basis points — the incremental monthly payment increases $3,” he said. “If I raise it 50 basis points, it’s a little over $7.”
By comparison, a reduced loan term can bump up the savings tenfold. “If I recede the term by three months from 66 to 63, the average monthly payment increases $21; by 60 months, it’s $44,” he said. Ultimately, consumers are focused on reducing monthly payments, he added.
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