November 2017
QUARTERLY CONSUMER CREDIT TRENDS
Growth in Longer-Term Auto
Loans
Kenneth P. Brevoort
Jasper Clarkberg
Michelle Kambara
Ryan Kelly
This is part of a series of quarterly reports of consumer credit trends produced by the
Consumer Financial Protection Bureau using a longitudinal, nationally-
representative sample of approximately five million de-identified credit records from
one of the three nationwide credit reporting agencies.
2 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
This quarter’s update to the CFPB’s Consumer Credit Trends dashboard shows that
the rapid increase in auto lending experienced for most of this decade started to
subside in 2016 and has continued to cool in 2017. Year-over-year lending declines,
which first began among borrowers with subprime or deep subprime credit scores,
have spread to consumers with prime or near-prime credit scores. Only lending to
consumers with super-prime scores has continued to show year-over-year gains.
The rapid growth in auto lending was accompanied by a second trend, an increase in
the use of longer-term financing for automobiles. The trend towards longer-term
auto loans has continued even as the auto financing market has begun to cool. In
this, the first Quarterly Consumer Credit Trends report, we explore what the data
reveal about the increased use of these longer-term loans.
FIGURE 1: DISTRIBUTION OF LOAN TERMS BY ORIGINATION YEAR
0%
25%
50%
75%
100%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Origination year
<3 years
3 years
4 years
5 years
6 years
7 years+
3 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
Figure 1 shows the distribution of lengths of auto loans for each origination year
since 2009.
1
As the figure shows, the share of loans with terms of six or more years
(“longer-term loans”) has increased steadily. These longer-term loans increased from
26 percent of auto loans originated in 2009 to 42 percent of 2017 originations. Most
of this growth can be attributed to six-year auto loans, which have become the most
common term used to finance automobiles, though loan originations with terms of
seven years or longer have also increased. The growth in these longer-term loans
appears to have come at the expense of five-year loans, as the share of loans with
terms under five years has remained relatively constant over this time period.
FIGURE 2: DISTRIBUTIONS OF CREDIT SCORES BY LOAN TERM
<3 years
3 years
4 years
5 years
6 years
7+ years
300 400 500 600 700 800
Credit score
Loan term
The use of longer-term auto loans is closely related to the credit score of the
borrower. Figure 2 shows the distributions of credit scores at origination by the term
of the loan. The credit scores of borrowers taking out loans with terms of six years or
longer are notably lower than the scores of borrowers who take out five-year loans.
2
1
For consistency, we use the same definition of “auto loans” in this analysis as is used in the Consumer
Credit Trends dashboard. This definition includes closed-end loans or leases used by consumers to
finance new or used automobile purchases.
2
The lowest credit scores, on average, are for borrowers who take out loans with terms of less than
three years. Distributions are for years 2009 through mid-2017.
4 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
The average credit score for borrowers taking out six-year loans is 674, which is 39
points below the average for borrowers taking out five-year loans.
FIGURE 3: DISTRIBUTIONS OF LOAN AMOUNTS BY LOAN TERM
<3 years
3 years
4 years
5 years
6 years
7+ years
10 20 30 40 50
Loan amount (thousands)
Loan term
Longer-term loan use is also related to the dollar amount being financed. Figure 3
shows the distributions of loan amounts by the term of the loan. As shown,
longer-term loans tend to be used to finance larger amounts. The average original
loan amount for a five-year loan was $20,100, compared to $25,300 for a six-year
loan. The average size of loans with terms of seven years or more was even larger at
$32,200. To the extent that consumers are buying more expensive cars, making
smaller down payments, or otherwise financing larger loan amounts, the increased
use of these longer-term loans may be a result.
Using a longer-term loan to finance an automobile reduces the size of the monthly
payment, while increasing the financing costs over the life of the loan. The data
suggest that the movement toward longer-loan terms has reduced the growth in
borrowers’ monthly payments. Figure 4 shows the average size of an auto loan at the
time of origination. The data have been indexed so that a value of 100 equals the
average 2009 loan size of $18,179. By 2016, average loan amounts had increased by
16 percent. This increase in loan amounts has mildly outpaced the inflation rate, as
5 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
FIGURE 4: LOAN AMOUNTS AND MONTHLY PAYMENTS
Average loan amount
Average payment
100
105
110
115
2009 2010 2011 2012 2013 2014 2015 2016 2017
Origination year
Index value (2009 = 100)
measured by the Consumer Price Index, which increased by 12 percent over this
same period. In large part because of the use of longer-term loans, monthly
payments have not experienced the same increase. The average monthly payment
over this time period, which is also shown in Figure 4 indexed to its 2009 average of
$375, increased by 7 percent.
3
While longer loan terms may make monthly payments more affordable, it is not clear
that consumers are better off taking out longer-term loans or that they will be more
likely to successfully repay the loan. Longer-term loans amortize more slowly and, as
a result, financing costs will be higher over the life of the loan. For example, a
borrower who uses a five-year loan to finance $20,000 at a 5 percent interest rate
will, after three years, have paid $2,190.27 in interest and have a remaining balance
of $8,602.98. If the same loan had been financed over six years at the same interest
rate, she would have paid about $152 more interest over the same three-year period
and had a remaining balance that was over $2,000 higher.
3
Another factor that may have limited the growth of monthly payments as loan amounts rose was the
interest rate environment that prevailed over this time period. According to data from the Federal
Reserve Board’s G.19 release, interest rates for five-year auto loans to finance new automobiles
decreased from 6.96 percent in 2009Q1 to 4.05 percent in 2016Q4.
6 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
FIGURE 5: CUMULATIVE DEFAULT RATES ON AUTO LOANS BY ORIGINATION-YEAR COHORT,
FIVE- AND SIX-YEAR LOANS
5−year loans
6−year loans
7 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS
In fact, the default rates associated with longer-term loans are higher than those for
shorter-term loans. Figure 5 shows the cumulative default rates for five- and
six-year auto loans originated from 2009 to 2015. We consider a loan to be in default
once it is 90 or more days past due or has a major derogatory event, such as a
repossession. Each line shows the cumulative default rate as a function of the
number of months since the loan was originated.
The higher default rates observed for six-year loans should not be interpreted as a
causal relationship. Borrowers who expect to struggle making the payments on a
loan financed over five years may be more likely to opt for a longer-term financing to
ease their financial burden each month. Riskier borrowers may thus prefer
longer-term loans, which is consistent with our earlier finding in Figure 2 that
borrowers taking out six-year loans tend to have lower credit scores than borrowers
with five-year loans. Nevertheless, the fact that there has been no decline in the
default rates associated with six-year loans as they have become more widely used
(in fact, default rates for both five- and six-year loans have been been increasing for
the most recent vintages) suggests that the movement toward these longer loan
terms may increase the likelihood of borrower default, potentially posing greater
risks to both borrowers and lenders.
8 QUARTERLY CONSUMER CREDIT TRENDS: GROWTH IN LONGER-TERM AUTO LOANS