MCLEAN, Va.–Credit unions have joined other lenders in warily watching as auto loan terms have gotten longer and longer and average payments have neared $1,000 a month, but the head of one of the nation’s largest auto finance lenders said the trend does not necessarily signal widespread financial distress, according to reporting by CNBC.
Sanjiv Yajnik, president of Capital One Auto, told CNBC that despite increases in vehicle prices, interest rates and insurance costs since before the pandemic, the share of income consumers devote to vehicle payments has remained relatively stable.
“If I just told you, ‘Car prices going up, interest rates going up, insurance prices going up,’ you would say, ‘You know what, consumers must be paying more as a ratio to the income,’” Yajnik told CNBC. “However, if you look at every quintile of salary and earnings of people, the payment-to-income ratio has remained fairly flat.”
What Payment-to-Income Ratio Shows
According to data Capital One Auto provided to CNBC, median monthly vehicle ownership payments increased from $390 in 2019 to $525 today. However, the payment-to-income ratio has remained near 10% since 2019, the lender said.
Capital One Auto also found that 80% of consumers financing vehicle purchases remain below the generally recognized affordability threshold of 15% of income devoted to vehicle payments.
“The consumer is being cautious. They’re being responsible. This is a much healthier way to do things than the alternative, because it’s not a discretionary spend,” Yajnik told CNBC, referring to the importance of vehicles for commuting and employment.
What Has Critics Worried
As CNBC noted, however, Critics of extended loan terms, however, argue that loans lasting six years or longer are increasingly leaving consumers underwater on their vehicles — owing more on their loans than the vehicles are worth when traded in.
According to data from Edmunds cited by CNBC:
- Approximately 26% of used-vehicle purchases involving trade-ins carried negative equity through April.
- Average negative equity on those transactions reached $5,105, up 35% from 2019.
Jessica Caldwell, head of insights at Edmunds, warned that longer loan terms slow the pace at which borrowers build equity in their vehicles.
“As loan term lengths increase on average, the pace at which consumers make progress paying down their balance slows,” Caldwell wrote in a recent online post cited by CNBC. “If consumers then trade in their vehicle too soon for any reason, they are increasingly left holding more loan debt.”
What Q1 Data Reveal
Edmunds data cited by CNBC showed that during the first quarter:
- 90.2% of new-vehicle loans involving negative-equity trade-ins carried loan terms of at least 72 months.
- 43% extended to 84 months.
- The average negative-equity trade-in for new vehicles was $7,183.
‘You’re Earning Money’
Yajnik acknowledged that longer-term financing requires consumers to hold onto vehicles longer to realize the value of the arrangement. Extended ownership periods, however, can also lead to higher maintenance costs and increased repair risks as vehicles age.
“Yes, it takes longer to get your equity, but in the meantime, you get a use of the car, and you’re earning money,” Yajnik told CNBC.
According to Cox Automotive data cited by CNBC, the average listed price of a used vehicle was $25,390 in March, compared with $48,667 for a new vehicle.
Cox Automotive also estimated that financing a $30,000 vehicle at a 9% annual percentage rate would cost roughly $3,100 more over an 84-month loan than over a 48-month loan if all other terms were equal. However, the longer loan reduces monthly payments by approximately $264.
Yajnik told CNBC that monthly payment affordability remains a key consideration, particularly for lower-income consumers.
“There’s obviously going to be pockets that have problems, but one has to start from a different place, which is, for which reason are people buying cars, and are they doing so irrationally?” Yajnik told the news outlet.
