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Americans get longer auto loans to take advantage of cheaper monthly payments, but as a result, they pay more to finance their cars and trucks. It’s a phenomenon that, according to the Consumer Financial Protection Bureau (CFPB), has continued to grow even as auto financing in general has cooled over the past two years.
CFPB’s tracking of around five million credit reports shows that auto loans grew rapidly in the 2010s, as credit in general rebounded from the slump of the Great Recession, and continued to increase until ‘in 2016, when it started to cool down, which it continued to do in 2017. But while auto loans have generally declined, the reliance on longer-term loans for car purchases and trucks continued to increase.
The CFPB report shows that longer-term loans – those with terms of six years or more – increased to 42% of auto loans created in 2017, down from just 26% of those created in 2009. There were a corresponding drop in five years. car loan year, which until now was the most common term to finance the purchase of a car.
Longer loan terms usually mean lower monthly payments, but a higher overall cost to the borrower. For a breakdown of how these calculations work, the CFPB gives this scenario: If a borrower gets a five-year loan to finance a $ 20,000 car purchase with an interest rate of 5.0%, after three years, the borrower will have paid $ 2,190.27 in interest and still have a remaining balance of $ 8,602.98. That same six-year loan would cost the same borrower $ 152 more in interest and still have a remaining balance of $ 10,747, or over $ 2,000 more.
The CFPB, a sort of consumer watchdog and advocacy body created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, has said longer-term loans have resulted in lower rates. defaults, were used more often by consumers with lower credit, and on average funded larger sums of money.
âThe shift to longer-term auto loans opens up more risk for consumers,â CFPB director Richard Cordray said in a statement. “These loans are more expensive and can cause consumers to continue paying even after they stop driving their cars.”
The CFPB has a downloadable file shopping comparison sheet this can help buyers determine how much they will end up paying for a car or truck and whether they can afford vehicle financing. It describes things like the length of the loan, the interest rate, optional add-ons, and fees.
Most Americans go into debt for a car or truck rather than paying cash; CFPB figures show that consumers get financing to buy 86 percent of new vehicles and 53 percent of used vehicles. In the United States, more than 90% of American households own a vehicle, and auto loans rank third behind mortgage loans and student loans for household debt.
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