TransUnion: Automatic loan terms lengthen as interest rates rise

As the Federal Reserve raises interest rates this year, the trend of longer terms for new and used auto loans will likely accelerate, says Satyan Merchant, Senior Vice President and Chief Automobile Business at TransUnion.

Borrowers seek to compensate for the rise in prices due to scarcity. “The term is really the only thing,” he said in a phone interview.

“That’s one of the few affordability levers that’s left is to extend the term. Going back to the end of last year, we know the Fed is going to raise interest rates, so the rate isn’t as effective a lever,” Merchant says. (photo below left).

Average interest rates had been a positive factor in affordability. In Q3 2021, average auto loan rates were down slightly for new and used, Merchant says: 8.2% for used versus 8.5% a year ago; 4.1% for new, against 4.3% a year ago.

Meanwhile, as new and used vehicle inventories persist, prices and monthly payments are expected to remain high in 2022.

The good news is that delinquencies of 60 days or more accounted for 1.59% of the total in Q4 2021. That’s virtually flat, in fact down slightly, from 1.61% a year ago.

The average amount financed on new vehicle loans reached a record $38,344 for the third quarter of 2021, an increase of 8.4% over the previous year. “That’s a significant number, reflecting higher vehicle prices and costs,” Merchant says. The third quarter is the last period for which TransUnion has detailed origination results.

For used vehicles, the average amount financed was a record $25,876 for the third quarter, up 22.3% from a year ago, according to TransUnion.

Average monthly car loan payments also hit record highs in the third quarter: $625 for new, up 8.4%; $472 for used, up 17.7%, according to the Chicago-based credit bureau.

Monthly payments would have been even higher, but borrowers took out a higher proportion of loans at 72 and 84 months. In the third quarter of 2021, loans of 84 months or more represented 17% of new vehicle loans, compared to 15% a year ago, or 13% in the third quarter of 2019 pre-pandemic.

For used vehicles, loans of 84 months or longer were 8% in the third quarter, compared to 5% a year ago, similar to 2019. Most of them were loans of 84 months, says Merchant.

Loans of 72 months to 83 months, mainly 72-month loans, accounted for 52% of used vehicle loans in the third quarter of 2021, compared to 48% a year ago, or 46% two years ago, according to Trans Union.

It’s also a positive that demand remains high and credit is readily available, Merchant says. “It’s an indication that consumers are ready to buy and finance whatever is available,” he says. “The merit is there; lenders are comfortable granting these loans.

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