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.

Besides Design, Technology And Price Wars, Long-Term Loans Driving Sales

There are just a few ways consumers are pushed into new car showrooms. Its 

due to a new design, price wars, consumers seeking the latest tech features 

or the need to replace an aging vehicle. However, Experian Automotive says 

cheap payments are driving loans due to 1 in 4 customers in the first quarter

stretching new-car loans from 60 to 72 months up to 73 to 84 months, up 27.6 

Car Mortgages:The Latest Trend in Car Financing

After receiving a few inquires about consumers stretching out their car loans, also known as "car mortgages," I decided to research this topic for an article I wrote for Black Enterprise magazine.

Could you imagine financing your next car for seven or eight years? According to a study by the Consumer Bankers Association, 58% of new vehicle loans in 2006 were for terms of six years or more, up by 3% from 2005. In used-vehicle loans, 48% were for six years or more, up from 40% for 2005.

What's driving consumers to opt for extended term auto loans? Michelle Singletary, syndicated personal finance columnist and host of her own show on TVOne, says, "People are doing it because they want more car than they can afford, and the only way to do that is to get a car payment longer than some people are married." Based on my personal analysis, like Singletary, I believe consumers are not purchasing vehicles within their budget, they aren't putting down a sizable down payment nor or they paying off their trades.

With a new vehicle costing an average of $29,024 in the third quarter of 2007, it took 24.8 weeks of median family income to purchase a vehicle, up .4 weeks compared to a year ago, according to Comerica Bank's Automobile Affordability Index. Moreover, in 2006 more than 36% of consumers were upside down - owing more on the vehicle than it's actually worth at the time of trade-in- based on data provided by the Power Information Network. Consumers financing their vehicles for three years or less owed an average of $3,588 on their trade, while those financing their vehicles for eight years or more owed an average of $5,157 at the time of trade in 2006.

Based upon the current economic climate, we know that the aforementioned numbers will continue to increase. Toyota Financial services recently announced they are now offering 7-year auto loans. Below is the typical profile of AmeriCredit extended term customers:

Annual income: $70,000 to $75,000

FICO (Credit) score: 670 - 800
Years at present employer: 9
Years of current credit history: 17
Percentage that are homeowners: 83%
Average amount financed: $25,200
Average annual percentage rate (APR): 9.5%
Specialty prime customers average finance terms: 7 years and 1 month
Source: AmeriCredit

Would you finance a car for seven or eight years? In some countries, consumers are allowed to finance their vehicles for ten years!