When the data on new car sales for the first quarter of 2021 is released this week, it is expected to show a recovery from the big drop last spring.
Even with car plants experiencing periodic shutdowns due to material shortages, sales of new vehicles have been one of the engines of the nation’s economic recovery from the economic downturn triggered by the pandemic.
But as sales recover, the length of the new car loans is creeping up, according to a survey by TrueCar. More than 80% of new car shoppers use some sort of financing to pay for their new vehicle, the data showed.
For many of the shoppers, a manageable monthly payment is critical, TrueCar said. In fact, TrueCar survey indicated 71% of the respondents said affordable monthly payments were the top priority on as they prepare to purchase a new vehicle.
Average vehicle prices rising
With the average price of a new vehicle is now approaching $40,000, the extended loan terms are being used more and more to make purchasing a new vehicle work within a buyer’s budget, TrueCar said.
Terms longer than 73 months now make up 30% of new vehicle loans, the firm reported. Moreover, since February 2020, the number of 84-month loans increased 13% from the previous year.
Sixty-month loans, which have become something of the norm for vehicle purchase, could be eclipsed in the not-too-distant future.
Longer loan terms help buyer’s budgets
TrueCar’s blog notes, “Extending a term to 66, 72, or even 84 months may bring shoppers a bit of payment relief. For example, if a buyer uses a $38,000 loan with a 5% interest rate payment for a 48-month or four-year loan the monthly payment would be $876. For a 60-month or five-year loan drops to $718 per month and on a 66-month loan the monthly payment drops to $660.
On a 72-month or six-year loan, the monthly payment drops to $612 and to $572 for 78 month-term, while the monthly payment drops to $538 per month on an 84-month or seven-year loan, according to the TrueCar.
TrueCar noted while leasing is an option for many shoppers, lease limitations may not line up perfectly, particularly for people who may need to modify a vehicle or drive long distances or may not be to return the vehicle to the bank in good condition once the term is completed.