This development in the auto loan market could be a bad omen
While it is unclear if that will happen, another sign of potential trouble in the auto loan market has appeared.
Reuters reported on Thursday that payment terms are getting longer:
Loan terms longer than five years are growing rapidly, and consumers may not recognize what they mean. While longer payment periods make for smaller monthly payments, they also mean consumers must keep the car longer or face negative equity if they choose to sell or trade sooner.
In other words, the car's value may depreciate well below the value of the outstanding value of the loan, and selling the car would not be enough to cover payments still owed.
While many investors have disregarded the concern over sub-prime auto loans, this continuing trend in loan terms is something to carefully watch. It could mean that a lot of new cars are being purchased with an eye on the monthly budget, rather than an awareness of how much money is ultimately being borrowed.
A lower monthly payment on a longer-term loan could indicate that consumers who need a new car are stretching, and making up for it by adding another couple of years in payments.