Journal of Credit Risk

Risk.net

Risks of long-term auto loans

Zhengfeng Guo, Yan Zhang and Xinlei Zhao

  • The choice of long-term auto loans is associated with larger origination amounts and borrowers of long-term auto loans tend to be more credit constrained.
  • Auto loans with terms beyond five years have higher delinquency rates than shorter-term loans during each year in their lifetimes.
  • The yield curve among auto loans is inverted, and the interest rates for 6+ year auto loans have become increasingly lower compared to shorter-term auto loans over time.

Long-term auto loans have become more popular in the last decade, and most auto loans originated after 2013 have terms longer than five years. We find that the choice of long-term auto loans is associated with larger origination amounts, and borrowers of long-term auto loans tend to be more credit constrained. After controlling for borrower risk factors available from credit bureau data and macroeconomic conditions, we find that auto loans with terms beyond five years have higher delinquency rates than shorter-term loans during each year in their lifetimes. We further find that the yield curves of auto loans are inverted, and the interest rates for auto loans of six or more years have increasingly become lower than those of shorter-term auto loans.

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