Longer auto loans rev up with sales

If your neighbor comes home with a new car and tells you he'll be paying for it over the next seven years, don't act surprised at the length.

New data from Experian found that auto loans with terms of six or more years surged in the fourth quarter. In fact, more than 25 percent of all new vehicle loans have terms of 73 to 84 months, with 12 to 14 percent of auto loans now stretching out over seven years.

"I haven't quite made up my mind on 84 month loans," said Melinda Zabritski, director of automotive credit for Experian Automotive. "Typically, the credit quality tends to drop the longer the loan terms. It has me concerned."

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Auto buyers are stretching out loan terms in an effort to keep their monthly payment as low as possible. In the fourth quarter of last year, the average monthly payment for a new vehicle auto loan was a record high $482, according to Experian. That's due in part to the growth in the total amount of money being borrowed for new vehicles. Experian says buyers are repaying $28,381, an increase of almost $1,000 compared to the last quarter of 2013.

"The type of vehicle people are buying has shifted. We're seeing more trucks and SUVs being bought and those models tend to cost more," said Zabritski.

Leasing Looking Better

With the average transaction (price paid at dealerships) now topping $32,000 according to Truecar.com, many people are opting to lease, not buy, a new vehicle. Experian says 1 in every 4 new vehicles purchased in the fourth quarter were financed with a lease. That is a big increase in leasing compared to 2009, when just 16.8 percent of new models were sold with a lease.

Read More Wells Fargo puts a ceiling on subprime auto loans

The average lease term is now 35 months, according to Experian, allowing buyers to lower their average monthly payment to $408.

"What we tell our customer is, 'If you're looking to get a lower payment, you'd be better off to lease rather than sign a seven-year loan'." said Mike Jackson, Chairman and CEO of AutoNation (AN), the country's largest publicly traded auto dealer group.

Subprime Growing

As auto sales have grown over the last six years, the percentage of vehicles sold to borrowers with subprime or deep subprime credit ratings have increased. Credit scores for people in those categories range from 300 and 600.

Experian reports those with the lowest credit ratings accounted for 10.76 percent of all new vehicle loans written in the fourth quarter of last year. That is a slight increase from 10.12 percent the previous year.

Even though loan monitoring firms like Experian report delinquency rates, and defaults on subprime loans remain below historical averages, some banks are pulling back on offering auto loans to those with the shakiest credit.

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Wells Fargo, one of the country's biggest auto loan financing firms said Monday it will impose a cap on amount of loans it will extend to subprime borrowers. The bank says no more than 10 percent of its auto loan originations will be subprime in quality.

AutoNation, which finances new vehicle sales through Wells Fargo, says the delinquency rate on subprime loans is approximately 5 percent. "The point is, people continue to pay their loans," said Jackson.

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