Increase of the Average American Car Loan Length

Car payments have been rising in the United States, resulting in an increase in car loan length. Part of the reason for this trend is an increase in the average price of vehicles, reaching a record high of $36,000 in 2018.

As a result of higher interest rates, we are extending our loans to 72, 84, or 96 months as a way to battle the price of their monthly payment. In January 2019, Americans as w whole have agreed to pay a median cost of $551 per month over 69 months to have access to the new car they want.

Some people might say that this decision-making process is evidence that Americans have robust confidence in the status of the U.S. economy. With over $1.1 trillion in existing debt out there and figures rising, it could also be a ticking clock to another recession.

How High Could Interest Rates Get for New Cars?

When car buyers were shopping for a vehicle in January 2017, households with good or excellent credit profiles were finding a rate of about 4.68% waiting for them at the financing desk. By the time 2018 came around, that figure had climbed it 4.99%.

The interest rate in January 2019 reached a 10-year high of 6.19%. When you consider the median selling price of a vehicle today, the monthly payments are getting out of reach for some individuals.

Some historical perspective is still essential to consider. Interest rates on four-year loans during the 1990s could have reached up to 12% depending on the individual. Compared to where they are today, buyers are still finding deals if they know where to look.

You Can’t Unsubscribe to a Car Loan Payment

Families can trim their subscription services, cable TV, and similar products when times get tough economically. You can’t do that with a car loan payment. It is a debt that you owe. Even if you give up the vehicle, there might be an outstanding loan balance that you must clear.

There are some red flags already present in the American economy. Over 7 million borrowers are at least 80 days delinquent on their auto loans, which is the trigger point for repossession with many lenders. That figure represents 1 million more people than were in the same position in 2010.

Deals are also getting tougher to find in the market. The number of zero-percent financing offers dropped to its lowest rate in 13 years as of January 2019.

The vehicles that drivers are purchasing are also bigger and bulkier. Before 2010, the best-selling car segment featured small and affordable models, such as the Ford Focus. Now crossovers, like the RAV4 by Toyota, are what catch people’s attention. It is a market swing that is so dynamic that automakers are canceling production lines. Ford has discontinued its Focus, Fusion, and Fiesta vehicles.

If you want to avoid paying too much each month, your down payment and the terms of the loan matter. Changing a 60-month term to 72 months can add over $1,000 to the final cost of the transaction. If you must extend the loan to 84 or 96 months, then that might be too much vehicle for your finances at this time. Be sure to consider all options and the long term implications when making a new vehicle loan purchase!