What are the longer loan terms doing to auto affordability?
The answer to this question is actually somewhat complicated.
The average duration of a new-vehicle loan in the United States is now a record 67 months, according to Experian Automotive. Further, 75- and 84-month loans are becoming more common, lenders say.
The longer loan terms yield lower monthly payments, but they can also make determining actual, real-world affordability more of a challenge. That Comerica Bank stopped publishing its well-regarded Auto Affordability Index a couple years ago doesn’t make the situation any better.
That’s why the Auto Buyer’s Affordability Index released July 15, by a shop called Requisite Press LLC, offers a bit of insight. According to Requisite, cars were more affordable last month than they were in June 2014 — 9% more affordable.
In fact, autos might be getting too affordable. How? Because the longer terms open consumers up to a negative equity position, where their trade-in is worth less than they still owe. It could also be problematic that while loans are getting longer, the rapid introduction of new, high-tech features is making cars obsolete faster.
“The increased use of long-term loans is often rationalized by pointing to the longer operating life of today’s cars,” said Phil Kelton, president of Requisite Press. “However, with the rapid advance of automotive technology, a 2015 model may be wholly inadequate in 2021—even if it’s still driveable.”
Kelton has a point there. In the race to make cars as affordable as possible, other, perhaps unforeseen risks, could percolate. Greater affordability, therefore, is a good thing. Until it isn’t.
