While the length of new auto loans has increased, borrowers are less likely than ever to keep the loans to full term, according to a new study from TransUnion.
The average term for new auto loans increased to 67 months in 2015 from 62 months in 2010, according to the study.
In the third quarter of 2015, 7 in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.
The study found that, despite the growth of longer loan terms, auto loan duration—the length of time a consumer keeps a loan and the loan remains in the lender's portfolio—has declined.
For auto loans originated in 2012, the average spread between term and duration has grown by nearly one month compared with loans originated in 2010. The study explored loans in this period to provide sufficient time for the loans to mature to payoff.
CUNA Senior Economist Perc Pineda said the composition of the auto sales market has changed since the start of the Great Recession in 2008.
“Motor vehicles expenditures as a percentage of total personal consumption expenditures has stayed between 3% and 3.5% after the Great Recession,” Pineda says. “That used to be about close to 4% and higher in previous years before it started dropping in 2008.”
While risks on longer-term auto loans are higher than short-term auto loans, credit unions auto loans delinquency rates are low, Pineda says.
“As of December 2015 the new auto loan delinquency rate was 0.42%,” he says. “So while industry analysts may worry about higher risks with longer-term auto loans, it is not a concern for credit unions who know their borrowers—their members—well beyond just a FICO score. That’s why asset quality at credit unions is exceptional.”
Based on CUNA’s May 2016 monthly estimates 12.9% of credit unions’ overall loan portfolio were new auto loans 21.3% were used auto loans.
TransUnion's study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in the third quarter of 2015 had 73- to 84-month terms, compared with 10% during third-quarter 2010.
TransUnion also found that even as average new-auto loan amounts increased between 2010 and 2015, the average monthly payment declined as consumers selected extended terms.
In the third quarter of 2015, the average new auto loan amount was $21,368, compared with $18,008 in third-quarter 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in 2010.
In terms of auto financing, with three- and five-year Treasury yields under 1% and 1.25%, respectively, Pineda says he expects auto loan rates to stay low for some time.
And with long-term auto loans gaining more popularity, he expects healthy auto lending at credit unions for the rest of 2016—a net positive for credit union members.
“Our economy could use more auto spending,” Pineda says.