High prices for new and used vehicles due to the global semiconductor and computer chip shortage are continuing to be a problem for car buyers and lenders alike, and longer loan terms are complicating things further. Giving more time for a borrower to pay back a loan at a lower cost to them might seem like a good idea to combat the steep prices, but this can backfire in the long run, especially if vehicle prices suddenly decrease as supply returns to normal.

According to a report from The Wall Street Journal, even before the COVID-19 pandemic began, loan durations were slowly becoming longer. Data from Edmunds showed that in the second quarter, the average length of an auto loan was 70 months for new cars and 68.9 months for used cars. Compared to 64 and 62 months respectively 10 years ago, this is a trend that has come about due to gradual car price increases over the years and competition among lenders. However, the global pandemic has exacerbated this trend to the point where it’s doing more harm than good to consumers’ wallets. While longer payment terms may seem to make cars more affordable for buyers, they can end up paying more than what the car is worth.

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Of course, the problem of paying more is only a problem for those able to purchase a car. As prices of cars increase, the number of American households able to afford a car is slowly decreasing. Credit Union Times reported that the recent Cox Automotive/Moody’s Analytic Vehicle Affordability Index found the average American household was less able to buy a new car in June than in May as car prices rose and incomes fell. Additionally, the report found that while longer loan terms and the decline of down payment size has made credit more accessible, more potential borrowers are being denied.

If your bank or credit union is to continue offering auto loans that are affordable and accessible to lower credit tiers, Open Lending’s Lenders Protection™ can help your financial institution do just that while mitigating risk and increasing profitability in your auto loan portfolio!