Consumer Group Says Car Loans Are Getting Longer and Costlier ""

By | November 3, 2017

Car Sales

Americans are getting longer auto loans to take advantage of cheaper monthly payments, but as a result, they are paying more to finance their cars and trucks. It’s a phenomenon that the Consumer Financial Protection Bureau (CFPB) says has continued to grow even as auto financing in general has cooled over the past two years.

The CFPB’s tracking of about five million credit records shows that auto lending rapidly increased in the 2010s, as credit in general rebounded from the doldrums of the Great Recession, and continued to rise until 2016, when it began to cool off, which it has continued to do in 2017. But even as auto lending has generally declined, the use of longer-term loans for buying cars and trucks has continued to go up.

The CFPB’s report shows that longer-term loans—those with terms of six years or more—increased to 42 percent of auto loans originated in 2017, compared with just 26 percent of those originated in 2009. There has been a corresponding decline in five-year auto loans, which until now had been the most common term for financing a car purchase.

CFPB Long-term Loans

Longer loan terms typically mean lower monthly payments but a higher overall cost to the borrower. For a breakdown of how that math works, the CFPB gives this scenario: If a borrower gets a five-year loan to finance a $20,000 car purchase with a 5.0 percent interest rate, after three years the borrower will have paid $2190.27 in interest and still have a remaining balance of $8602.98. That same loan financed over six years would cost the same borrower $152 more in interest and still have a remaining balance of $10,747, more than $2000 higher.


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The CFPB, a kind of consumer watchdog and advocacy agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, said the longer loans have carried higher default rates, have been used more often by consumers with lower credit, and have on average financed larger amounts of money.

“The move to longer-term auto loans is opening up more risk for consumers,” CFPB director Richard Cordray said in a release. “These loans are more expensive and can result in consumers continuing to owe even after they are no longer driving their car.”

CFPB Long-term Loans

The CFPB has a downloadable shopping comparison sheet that can help buyers determine how much they ultimately will end up paying for a car or truck and whether they can afford financing for a vehicle. It outlines items such as the length of the loan, the interest rate, optional add-ons, and fees.

Most Americans go into debt for a car or truck rather than pay cash; CFPB figures say consumers get financing to purchase 86 percent of new vehicles and 53 percent of used ones. In the United States, more than 90 percent of American households have a vehicle, and auto loans are third only to mortgages and student loans for household debt.

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