If you're in the market for a new car, the length of the average auto loan may surprise you. Loans for many years were typically around five years or 60 months. Buyers now seek varying loan lengths and terms, depending on the vehicle and the state of the economy at the time of purchase.
New Car Loans
The average length of new car loans tends to increase in times of economic hardship. The longer term allows for lower payments, which make the purchase more affordable for the buyer on a monthly basis. The average length of an auto loan stretched to 69.3 months according to Bloomberg, as of 2017, which is 6.8 percent higher than five years ago. Many buyers even push their payment schedule way beyond that, with seven- and eight-year loans becoming more prevalent. The extended loan term, of course, brings increased profit for lenders who collect more interest during the loan. The lenders also will increase interest rates and assess fees for buyers with subprime credit.
Used Car Loans
New car loans have more flexible terms than used car loans. A used car provides less of a known quantity. The average used car loan is typically less than what you'd find with a new vehicle. A used car typically has a shorter and more limited warranty than a new vehicle -- if any warranty exists -- and has a lower probability of lasting the life of a long-term loan. The interest rates on used car loans are typically higher than a new car loan.
The term of the average car loan is driven by the majority of borrowers who have less than prime credit ratings when they apply. Lenders leverage the risk of these subprime loans by increasing the amount of interest collected and the amount of time that interest will be paid. In a weak economy, car loans are still considered a safe and profitable business for many debt buyers like private-equity and investment firms. The loans made by your lender can thus be sold off at a quick profit so more loans can be made. The result is even more loans with terms that are much more flexible than they would be if the bank was shouldering the risk alone.
History of Car Loans
Car loans as we know them began in the 1970s, with an average term length of around 35 months. Back then the cost of the average car was about $3,000 and interest rates were in the 12 percent range. With such short-term loans, lenders had to make their money quickly, and the high interest charges accomplished that task. It took until 1998 for auto loan interest rates to drop below 6 percent, after which they fluctuated up and down for a few years before hitting a low of 2.72 percent and an average length of about 60 months in 2002. The low rates and longer loan terms that have become the norm in the decade from 2002 to 2012 were the result of economic stimulus programs. Since 2012, rates have remained low due to competition and lack of action by the Federal Reserve, says U.S. News & World Report. Today the rates are increasing, but at a slow and steady pace.
- Fox Business: More Consumers With Bad Credit Scoring Car Loans
- Washington Post: Subprime Loans Return With Economic Risk and Rewards: QuickTake
- DMV: Auto Loan Terms
- Cars Direct: Types of Auto Loan Terms
- CNBC: Car Owners Are Holding Their Vehicles for Longer, Which is Both Good and Bad
- MSN Money: Should You Get a 7-Year Car Loan?
- Bloomberg: U.S. Average Auto Loan Length Balloons to All-Time High
- Autotrader: Buying a Car: What Term Should Your Loan Be?
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.