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TransUnion: As Terms Stretch, Loan Duration Shrinks

July 14, 2016

CHICAGO — Despite the proliferation of longer loan terms, the length of time a consumer keeps a loan and that loan remains in a lender’s portfolio has declined, according to a new study from TransUnion.

From 2010 to 2015, the average term for new auto loans rose 62 to 67 months, with seven out of 10 new auto loans having terms longer than 60 months in the third quarter of 2015.  In 2010, only half of all loans had terms longer than 60 months. The reason for the increase: rising vehicle prices.

“In recent year, longer term auto loans have grown in popularity as consumers aim to keep monthly payments at a certain threshold,” said Jason Lacky, a TransUnion executive, noting that the average spread between term and duration for loans originated in 2012 has grown by nearly one month compared to loans originated in 2010. “However, our study found that consumers are keeping their loans for a shorter period — a likely result of the low interest environment that has allowed more borrowers to refinance their loans.”

The study concluded that lenders may not be capturing the benefits of more payments and greater interest income they might expect from longer term loans, as borrowers are remaining in their loans about one month less.

Between 2010 and 2015, according to the study, auto loan terms between 73 and 84 months more than doubled, with a quarter of all loans originated in 2015’s third quarter having terms between that band. In the third quarter of 2010, only 10% of loans had terms in that band.

Also increase during that period was the average finance amount for new vehicles. In last year’s third quarter, the average loan amount was $21,368, compared to 18,008 in the third quarter of 2010. During that same period, the average new-vehicle loan payment declined from $420 to $398.

Longer loan terms also lead to high delinquencies, the study also noted. “Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” said Laky. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquencies rates for 72- and 84-month loans.”


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