Forty-two percent of auto loans issued over the last year will require at least six years to repay, marking a sharp increase since 2009 when just 26 percent of auto loans had six-year repayment terms, the Consumer Financial Protection Bureau (CFPB) reported on Wednesday.
The CFPB’s report found that the higher number of six-year auto loans contributed to a downturn in the number of five-year loans as six-year loans were more popular among borrowers with lower credit scores. The average credit score of six-year loan borrowers was 39 points lower.
“The move to longer-term auto loans is opening up more risk for consumers,” CFPB Director Richard Cordray said. “These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car. Consumers should know before they owe and shop for the best deal based on costs incurred over the life of the loan.”
Consumers buying more expensive cars are more likely to select longer repayment terms, the CFPB report found. The average five-year loan amount was $20,100, the average six-year loan amount was $25,300 and the average seven-year loan amount was $32,300.
“These increased amounts may be the result of consumers buying more expensive cars, making smaller down payments, or otherwise financing larger loan amounts by including additional warranties or products in their auto loan,” CFPB stated.
Auto loans with longer terms are also more prone to defaults. Six-year loan default rates exceeded 8 percent in recent years, while shorter-term loans have default rates of approximately are closer 4 percent, CFPB reported.