Report shows sharp increase in riskier long-term auto loans

Pittsburgh Post-Gazette

Consumers are taking out car loans for longer terms, costing them more in interest and putting them at greater risk for default.

Some 42 percent of auto loans made over the past year had a payback term of six years or more, according to a new report by the Consumer Financial Protection Bureau. That’s up from 26 percent in 2009.

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

Auto loans are the third largest category of household debt for Americans, behind mortgages and student loans.

Eighty-six percent of new vehicles are purchased via financing compared with 53 percent of used vehicles, according to the bureau.

The longer the loan’s term, the bigger the risk of default. The default rate on loans of six years or more is 8 percent, or about double that of shorter term loans, the bureau said.

Longer term loans also cost more. For example, a $20,000 loan at 4.75 percent paid off in three years would cost $1,498 in interest. That compares with $3,024 in interest on a six-year loan.

The bureau last year released a guide aimed at helping consumers shop for an auto loan.

Available at www.consumerfinance.gov/consumer-tools/autoloans/, the guide helps people decide how much they can afford to borrow, compare terms of loan offers and negotiate the best deal. The guide also walks consumers through each step of the auto finance process.