Longer Car Loans surge as Vehicle Prices Climb, Raising Recession Concerns
WASHINGTON – A growing trend of longer-term auto loans – stretching to seven adn even eight years – is raising red flags among industry experts, mirroring conditions seen before the 2009 financial crisis. Data released Monday by Edmunds.com reveals that 21.6% of all new-vehicle financing in the second quarter involved seven-year loans, while eight-year loans, though still less then 1%, are on the rise.
This shift is directly linked to the soaring cost of new vehicles, which have jumped 28% in the last five years to an average price of nearly $50,000, according to the Edmunds report. While longer loan terms make monthly payments more manageable, they come with significant financial risks for borrowers.
The Risks of extended Financing
Extended car loans build equity slowly, increasing the likelihood that a buyer will owe more on the vehicle than it’s worth – a situation known as being “underwater” – when they eventually seek to trade it in. Furthermore, borrowers end up paying considerably more in interest over the life of the loan compared to shorter-term options.
The trend also impacts dealerships. Longer loan terms tend to encourage customers to hold onto their vehicles for a longer period, perhaps slowing down trade-in volume.
“We - dealers, manufacturers, auto lenders – don’t learn our lessons from the past,” commented Mike Schwartz, vice president of dealer operations at Los Angeles dealership Galpin Motors. “I’m sure bank presidents back then said, ‘we’re never doing 96-month loans again.’ And here we are, 15 years later, and we’re getting right back into it.It’s crazy.”
Echoes of the Past & Rising Negative Equity
Eight-year car loans where largely abandoned by lenders in the years following the Great Recession, having briefly appeared just before the 2009 economic downturn. their resurgence now is fueling concerns about a potential repeat of past mistakes.
Edmunds reported in July that negative equity in new-vehicle trade-ins reached a four-year high of 26.6% in the second quarter. The average amount owed on these underwater loans stood at $6,754, nearing an all-time high.
“Consumers being underwater on their car loans isn’t a new trend,” explained Ivan Drury, Edmunds director of Insights, in a July 29 press release. “Affordability pressures, from elevated vehicle prices to higher interest rates, are compounding the negative effects of decisions like trading in too early or rolling debt into a new loan, even if those choices may have felt manageable in years past.”
Industry Concerns Grow
The rising risk is also being felt by used car retailers. CarMax, in June, increased its provision for loan losses to $101.7 million, up from $81.2 million during the same quarter last year, citing both loan performance and a generally uncertain economic outlook.
Evergreen Context & What to Watch for:
The current situation highlights a long-standing tension in the auto industry: the desire to make vehicles accessible to a wider range of buyers versus the potential for unsustainable lending practices. Historically, extended loan terms have been a warning sign of broader economic vulnerabilities.
Key factors to watch include:
Interest Rate Trends: Further increases in interest rates will exacerbate the cost of long-term loans.
Vehicle Price Stabilization: A decline in new vehicle prices would lessen the need for extended financing.
Delinquency Rates: Monitoring the rate of borrowers falling behind on their car payments will be crucial in assessing the health of the auto loan market.
Economic Slowdown: A broader economic recession could significantly impact borrowers’ ability to repay their loans, potentially leading to a surge in repossessions.Sources:
Edmunds.com: https://www.edmunds.com/
Edmunds – Underwater Car Loans: [https://www.edmunds.com/industry/press/underwater-car-loans-on-the-rise-more-than-1-in-4-trade-ins-had-negative-equity-in-q2-2025-according-to-edmunds.html](https://www.edmunds.com/industry/press/underwater-car-loans-on-the-rise-more-than-1-in-4-trade-ins-had-negative-equity-in-q2-20