Auto loan payments and terms are on the rise — What's the problem?

Brian Landau
Blog Post10/11/2017

What does a healthier economy mean for automotive financing? Well for one, it means (at least in part) that consumers are benefiting from advantageous financing opportunities. Higher average vehicle sales prices signal a positive trend for the industry while extended terms can help consumers purchase and finance their next vehicle. However the question remains: is this sustainable? Let’s take a look at the some data gathered by TransUnion’s Financial Services Research and Consulting group. 

Since 2013, our data shows us that the average amount financed has risen from $19,947 to $23,248, or 5.2% per year over three years. For comparison, real median household incomes during this time period increased from $51,758 in 2013 to $55,775 in 2016, or 2.5% per year. [1]

Average amount financed for vehicle purchases | TransUnionThe above chart shows the average dollar amount consumers financed for vehicles purchased in the United States from 2013 - 2017.

Over the same time period the average term for auto loans has risen from 62 to 65 months. While financing options of this kind can mean lower payments each month, we see a potentially alarming trend.

Average term of an automotive loan | TransUnionThe above chart shows the average monthly term of an automotive loan for consumers purchasing vehicles in the United States from 2013 - 2017.

Here’s an example of how this can put stress on the industry. In 2013 a consumer looking to purchase a vehicle for $20,000 at a 5.8% interest rate would have a monthly payment of $374 on a 62 month loan, the average number of financed months at this time based on TransUnion data. However, a consumer in the fourth quarter of 2016 with similar income, may be more likely to finance a $23,000 vehicle over the course of 65 months, bringing their monthly payment up to $413 at the same 5.8% interest rate. In this example, this results in an additional amount of $39 per month or $2,535 for the entire term of the loan.

So what’s the problem?

These consumers are increasing their monthly payments and committing themselves to longer terms, which logically could increase the likelihood of default. Our research shows that near-prime auto loans with long terms (>72 months) are 50% more likely to go delinquent than those with standard terms (49-60 months).

In a recent blog post we discussed how over the same period, non-prime delinquency rates have increased 39 BPS from 0.91% in Q1 2012 to 1.30% Q1 2017. [2],[3] New-vehicle incentives and used-vehicle inventory continue to climb to historical levels, putting downward pressure on used-vehicle values while raising concerns for lenders who own the collateral and manage credit risk. This trend has automotive lenders and dealers involved in financing concerned that the industry is becoming increasingly volatile.

What should you do?

Get ahead of the potential problem by improving your organization’s ability to access information. Authenticating customers up front by validating who they are, or who they claim to be, can reduce risk throughout your sales and collections process. A better understanding of your customers can help support a healthier ecosystem of new car sales, off-lease sales, trade-ins and used car sales.

The right data can help to better position your organization to meet pent-up demand as a result of macro-economic factors. Lower unemployment, lower interest rates and lower cost of ownership have brought consumers back to dealerships. But failing to see the big picture could cost you down the road.

TLOxp for the automotive industry provides dealers with the  right data, better results, right now.

[1] https://www.census.gov/topics/income-poverty/income/data/tables.html
[2] A basis point (BPS) is equal to one hundredth of one percent.
[3] Source: TransUnion Credit Database; Research & Consulting Analysis