Tiffany Franc, an attorney in Towson, Md., was surprised when she and her husband had no trouble getting a car loan last October. They had completed a short sale of an investment property in June, and short sales typically damage credit substantially.
They were purchasing a used 2013 Dodge Avenger. They went to their credit union and were approved for an auto loan at 5%. Franc says the 5% rate was “phenomenal” since their credit tanked after the short sale. Yet, they got an even better rate in the end.
“At settlement, our loan ended up being 3.74%,” Franc says. “We received a 0.25% interest reduction with auto debit from my checking account.” The average 60-month new auto loan cost 4.08% when she was in the market, according to Bankrate.
Franc’s story isn’t unusual in today’s market. Credit has become easier to obtain, even for borrowers with lower credit scores. And according to a Feb. 25 report from TransUnion, a credit and information management company, consumers have been taking on increasing amounts of auto loan debt for almost three years straight. The average borrower had an auto loan balance of $16,769 at the end of 2013. Auto loan debt hit a low point in early 2010 at just $14,764 per borrower, and has been increasing ever since.
Why Consumers Are Taking out Larger Auto Loans
Average interest rates on 60-month new car loans are 4.2% right now, according to Bankrate. At this time last year, the same loan cost 4.09%. But back in 2009, this loan cost consumers 6.91%.
Lower interest rates make it less expensive to borrow more money. On a $17,000, 60-month new auto loan at today’s 4.2% average rate, you’ll pay $315 a month and a total of $1,877 in interest over the life of the loan. Back in 2009, at 6.91%, the monthly payment would have been $336 and the total interest expense would have been $3,154, a difference of $21 per month and $1,277 overall.
Consumers aren’t just taking out larger auto loans, they’re also taking out more of them. The number of loans increased by 3.5 from 57 million to 60.5 million last year. One reason for the increase in loan volume is probably the increase in auto sales, which increased to 15.6 million last year. That’s a 7.6% increase from 2012, and a 50% increase from 2009, when annual sales were just 10.4 million. Edmunds predicts even higher sales in 2014. The increase in sales could be increasing both the number and average balance of auto loans.
“Higher prices of both new and used vehicles make for larger car notes,” says Terry Anderson, partner and manager of Auto USA, which consists of two used car dealerships in the Dallas/Fort Worth area. “The new car business is not quite as generous with rebates as a few years ago,” he says, and manufacturers such as GM are no longer flooding the market with inventory, then discounting heavily to make sales. “The price stability has trickled down to the used car business,” he says.
Consumers may also be taking on more auto loan debt, because they’re feeling better about the economy. The unemployment rate fell from 7.9% in December 2012 to 6.7% in December 2013, and consumers are feeling more optimistic. US consumer sentiment has averaged 71.0 since 2008, according to Thomson Reuters/University of Michigan’s overall index of how consumers feel about their personal financial situations and the overall economy. February’s 81.6 measurement is significantly above that average and about 10 points higher than one year ago. Consumers tend to spend more when sentiment is up.
With improvements in the economy, consumers who were finally able to refinance their mortgages gained enough breathing room in their budgets to afford car payments, and consumers who couldn’t afford cars over the last several years finally started buying.