97-Month Car Loans Become A Reality, But There Are Plenty Of Risks For Lengthy Terms

A 97-month-long car loan is set to become a reality due to low interest rates and increased competition among car manufacturers. Steadily rising car prices and lenders trying to attract new customers have led to the trend of longer loan periods.

The Wall Street Journal reported the new longer loan periods and provided an anecdotal account of a woman who took out a loan to buy a 2013 Toyota Camry. The woman, Nakisha Bishop, took out a $23,000 loan to pay for the new car and to pay off what she owed on her previous car. Bishop’s loan was for 75 months, just over six years, and she will pay $480 a month for the Camry. The WSJ reports that the monthly payment is just $5 more than what Bishop had been paying for her previous car.

Longer loan terms mean banks can offer lower monthly payments, which can attract more borrowers. The price of a new car has increased over the last few years, with the average price around $31,000, up $3,000 from four years ago, the WSJ reported. As new cars become increasingly expensive, new customers may need to find new ways to afford a vehicle -- which could make a 75-month or even a 97-month loan enticing to some.

The average monthly payment for a loan has decreased due to lower interest rates and the increased popularity of longer loan terms among lenders. Experian Information Solutions Inc.'s report on Q4 2012 loan terms and lengths, released in March, notes the increased popularity of longer loans. According to Experian Automotive, average loan terms are at 65 months, an all-time high, and it noted drops in interest rates and monthly payments as well. Longer loan terms of 73 or 84 months are increasingly popular, marking an increase of 19.4 percent from Q4 2011. There were also some lengthier loans, as high as 97 months, reports the WSJ. Average monthly payments were at $460 in Q4 2012 compared with $468 in Q4 2011.

There are risks to longer loan terms. As noted by the WSJ, it will take borrowers a longer period of time to reach the point where their debt on the car is less than the value of the car. This could make it difficult to sell or trade the car as the owner will need to be able to continue making the monthly payments until the loan is paid off.

Longer term loans can also hurt car manufacturers because they keep customers away from buying new cars at dealerships for a longer period of time than usual.

Other factors, such as the average age of a vehicle (i.e., around 11 years), better credit availability and low default rates for automotive loans, have also led to the rise of longer loan terms for new vehicles.