Consumers shorten auto loan duration

A new study from TransUnion has found that even as the term of new auto loans has increased, the duration of time a consumer remained in these loans has declined.

The study found that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.

However, the study found that, despite the proliferation of longer loan terms, auto loan duration—the length of time a consumer keeps a loan and such loan remains in a lender’s portfolio—has declined.

For auto loans originated in 2012, the average spread between term and duration has grown by nearly one month compared to loans originated in 2010.

“In recent years, longer-term auto loans have grown in popularity as consumers aim to keep monthly payments at a certain threshold. However, our study found that consumers are keeping their loans for a shorter period – a likely result of the low interest environment that has allowed more borrowers to refinance their loans,” explains Jason Laky, senior vice president and automotive business leader for TransUnion.

Laky says this trend is important for lenders, because as borrowers remain in their auto loans about one month less, lenders may not be capturing the benefits of more payments and greater interest income they might expect from longer-term loans.

Borrow more, pay less

TransUnion’s study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in Q3 2015 were between 73 and 84 month terms, compared to just 10% in Q3 2010.

TransUnion also found that even as average new auto loan amounts increased between 2010 and 2015, the average monthly payment declined as consumers selected extended terms.

In Q3 2015, the average new auto loan amount was $21,368, compared to $18,008 in Q3 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in Q3 2010.

Even with smaller monthly payments, the study found that consumers with longer loans are more likely to be seriously delinquent (defined as ever 60 days or more past due) than borrowers with shorter terms, even when controlling for credit risk score.

“Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” said Laky. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans.”