Despite "Car Mortgages" Increasing By 20% In 5 Years, Consumers Are Trading Out Of Them Earlier
A new study from TransUnion found that even as the term of new auto loans has increased (also know as "Car Mortgages"), 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, 70 percent of new auto loans had terms longer than 60 months. Ironically in 2010, only 50 percent of all loans had terms longer than 60 months.
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. The study explored loans in this period to provide sufficient time for the loans to mature to payoff.
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.
TransUnion’s study found that auto loan terms between 6 and 7 years have more than doubled between 2010 and 2015. Twenty-five percent of all loans originated in the third quarter of 2015 were between 73 and 84 month terms, compared to just 10 percent during the same time period in 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 the third quarter of 2015, the average new auto loan amount was $21,368, compared to $18,008 in the third quarter of 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in third quarter of 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.