New-car loans keep getting longer

Greg Gardner | Detroit Free Press

Show Caption Hide Caption Length of New-car Loans Hit New Record New car sales are running at near peak levels, partly because many consumers are financing their purchases for longer terms.

New-car sales are running at near-peak levels, partly because many consumers are financing their purchases for longer terms.

The average new car loan has reached a record 67 months, reports Experian, the Ireland-based information-services company. The percentage of loans with terms of 73 to 84 months also reached a new high of 29.5% in the first quarter of 2015, up from 24.9% a year earlier.

Long-term used-vehicle loans also broke records with loan terms of 73 to 84 months reaching 16% in the first quarter 2015, up from 12.94% — also the highest on record.

"While longer-term loans are growing, they do not necessarily represent an ominous sign for the market," said Melinda Zabritski, Experian's senior director of automotive finance. "Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.

"However, it is critical for consumers to understand that if they take a long-term loan, they need to keep the car longer or could face negative equity should they choose to trade it in after only a few years."

The average amount financed for a new vehicle also hit a record high of $28,711 in the first three months of the year, up from $27,612 a year earlier. The average monthly payment for new vehicles also rose to $485 in the quarter ended March 31 from $474 a year earlier.

But as long as the credit is flowing freely at low interest rates, consumers, lenders and automakers are happy.

The industry reports May U.S. car and truck sales Tuesday, and some forecasters expect the annual rate to exceed 17 million units, a level not seen since the height of the housing bubble a decade ago.

Experian also reported that leasing continues to rise, hitting a record of 31.5% of all new-vehicle transactions in the first quarter of this year, up from 30.2% a year earlier. Leasing enables many consumers to drive away with a more expensive vehicle while keeping their monthly payment within their budgets.

However, the resurgence of leasing will have an effect in the next few years because an increasing number of vehicles coming to auction at the end of leases will drive down used-vehicle prices. That means that the value that people who own vehicles get upon trade-in will drop, requiring them to borrow more, possibly at higher interest rates, or settle for a less expensive car.

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