The USA’s Consumer Financial Protection Bureau (CFPB), part of the American government, has expressed doubts over whether longer car loan terms provide any actual benefit to consumers.
In the latest of its quarterly reports on US consumer credit, the CFPB found that loans and leases with terms of six years or more increased from 26% of all loan originations in 2009 to 42% in 2017. The increase in share was mostly at the expense of five-year loans.
Such long-term loans covered amounts of between $5,000 (£3,800) and $12,000 more than five-year loans. At the same time, the average consumer credit score for six-year loans was 5% lower than for a five-year term.
Although longer terms help decrease monthly payments, the CFPB noted that such loans amortise more slowly, and the overall cost would be higher than if the borrower had opted to repay the same principal over a shorter term.
The report also noted a correlation with higher default rates for six-year terms.
It said: “The fact that there has been no decline in the default rates associated with six-year loans as they have become more widely used … 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.”