Experts Say 72-month Car Loans Don’t Mean Disaster

Experts Say 72-month Car Loans Don’t Mean Disaster

The previous few months have seen an increase in car buyers accepting longer loan terms to make monthly payments smaller. Because new auto loans have been stretched out, borrowers are now being offered some of the most favorable terms in quite some time.

According to new data from LendingTree, the most common auto loan in the United States is for 72 months. The second most common loan length is for 60 months. 43% of businesses are financed for 72 months or more, up to five points from 2020 and eight points from five years ago.

Usually, the loan terms last longer than that a driver usually owns the car, according to Dr. Cliff Robb, a professor at the University of Wisconsin-Madison who specializes in consumer sciences.

He told Newsweek that the average person typically wants a new car after about five years. This is one of the reasons these loans are so attractive. 

Today, most auto dealers sell less inventory and charge premiums over, thinking they would drive a car until it broke down. In some cases, however, outside factors, such as the marketing of newer cars or friends purchasing newer cars, can convince owners to buy a newer car sooner than anticipated.

Drivers are turning to dealership lots looking for a newer model because they have years of financing on their ledger.

Tyson Jominy, vice president of data and analytics at J.D. Power, said that longer auto loans are not new. He explained to Newsweek that extended-term financing has been increasing throughout his life.

He argues, however, that the real change is in how consumers approach auto financing. Twenty-five percent of new vehicle purchases before the pandemic were leased. Now, 20 percent are leased.

The average buyer can obtain lease-level payments with no mileage restriction by entering into 60-, 72-, and 84-month term loans — the manufacturer's suggested retail price (MSRP). The lack of negotiation on inflated-priced cars leaves buyers feeling that they have few options when purchasing a vehicle.

According to Robb, dealerships take advantage of this situation to upsell. Customers with longer terms and, consequently, lower monthly payments can tolerate more options or a higher trim level.

Likewise, automakers note the trend, sending high-grade options to dealerships unless alternatives are specially ordered.
In dealing with vehicle purchases, he claims consumers tend to focus on information that's easier to understand. Undereducated buyers believe that a lower monthly payment is better in this case.

Credit Karma recently reported that 23% of respondents regretted a recent vehicle purchase. Their top two reasons for not making the purchase were that it strained their finances or they had difficulty making the monthly payments.

That doesn't indicate conditions in the auto market but rather other factors. According to Jominy, subprime loans and leases are much less prevalent than during the 2008 financial crisis.

Robb says that longer terms are here to stay and serve as a powerful marketing tool to win and keep customers. On the plus side, they are more affordable, and the downside is that consumers might end up paying more for the loan than the car is worth. When financing a vehicle, experts agree that it is essential to consider all the costs involved, such as insurance and maintenance, not just the initial cost.