Rising interest rates and increasing costs to borrow money had a predictable result last year: more carbuyers turned to longer car loans for lower monthly payments. Nearly one in five carbuyers by the end of Oct. 2022 had a seven-year loan to purchase a new car, and almost one in 10 used carbuyers opted for a seven-year loan, according to Automotive News.
Those 84-month financing terms are almost certainly due to rising costs to borrow money, and reportedly even some new-car debt was even longer. Automotive News quoted a Hyundai financing dealer who said 60% to 70% of new car loans at her dealership were 84 months long or longer. “It’s insane,” Headquarter Hyundai (Sanford, Florida) Finance Director Jasmine Figueroa told Automotive News.
That’s a nearly twofold increase in the number of 84-month loans since 2018. Credit bureau Experian said that by the end of fall 2018, 10.5% of new car loans and 4.1% of used car loans were 84 months long. In four years, those numbers have roughly doubled—to 19.3% and 10.3%, respectively, in 2022. The figures for 2022 represent the largest increase in those seven-year loans, year over year, too. Last year, 15.2% of new car buyers and 7.5% of used car buyers opted for a long loan.
It's not hard to see why. Today’s federal funds rate, which sets a baseline for how expensive it is for banks and credit unions to borrow money, is between 4.25% and 4.5%, compared to just a year ago when that rate was nearly 0%. In fact, the federal funds rate is the highest today as it’s been in 15 years to cool inflation. Buyers fixated on a monthly payment vs. overall cost would likely trend toward longer-term loans. For qualified buyers, new car loan rates can start between 4.5% and 7%, with higher rates for longer loans. A five-year car note at 4.5% for $20,000 borrowed nets a monthly payment of about $380 versus a seven-year loan at 8% can save about $50 per month. Over the life of the loan, however, the payout on the seven-year loan is roughly $10,000 more than the five-year loan.
As interest rates stay level, or even rise, it’s likely that a seven-year loan could become more common—even surpassed, according to Figueroa: "I'm waiting for someone to tell me they have a 10-year loan on their car."
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