Posted on 03/18/2008 9:56:02 AM PDT by Incorrigible
By ROBERT SCHOENBERGER
Americans today take nearly two years longer to pay off car loans than people did 30 years ago — a trend that has helped bury consumers in debt and automakers in deficits.
A typical car loan now lasts five years, and many stretch to seven, data from the Federal Reserve show. And the length will only go up.
Toyota in January announced it would offer seven-year terms on some loans. Analysts said eight-year offerings are rare but growing in popularity.
"Just a few years ago, some banks didn't even offer a 72-month loan," said Jesse Toprak, chief economist with automotive research firm Edmunds.com. "It seems like a problem with no solution on the horizon."
For consumers, long-term loans tie up budgets, preventing people from saving or paying off other debts.
For automakers, the long loans can depress future auto sales because consumers are too strapped to buy new cars.
Don't blame today's economy.
The trend toward longer-term loans didn't start last year or even in the last decade. Since at least 1975, when the Fed began tracking auto loan data, the length of car notes has steadily gone up.
The reason: Long loans mean low monthly payments. That means people can buy more expensive vehicles and still be able to afford mortgages, credit card bills and other expenses.
Jennifer Horton, an Akron, Ohio, mother with her second child due in July, said she will count on a long-term loan to help her buy a minivan later this year.
"It has to fit into our budget," Horton, 28, said while examining a Dodge minivan at the Cleveland Auto Show in February.
She knows it will tie up her budget longer to finance over five or six years, but the alternative is buying a car that may be too small for her growing family.
Many car shoppers had similar attitudes.
"The monthly payment is very important to me," said Michelle Legat, 32, of Broadview Heights, Ohio, while looking over a Chevrolet Malibu at the auto show.
She added that she would clearly choose a five-year loan for the Malibu over a three-year option for a smaller car.
"I don't like payments. I'm struggling right now between keeping my car that's paid for or taking on a payment. But it's time," Legat said.
Consumers have spent more and more on cars almost every year since the Fed started keeping track.
The typical buyer in 1975 borrowed about $17,000, adjusted for inflation, to buy a new car. By 2006, that figure had climbed 63 percent, to more than $27,000.
But monthly payments haven't changed much.
In 1975, the average car buyer spent $523 per month, adjusted for inflation, compared with $496 now.
Jean Ann Fox, director of financial services for the Consumer Federation of America, said the fact that monthly payments have stayed within such a small range for so long is proof that consumers shop to fit payments.
"The car dealer hopes that (the monthly payment) is all you're looking at," Fox said. "That's a car dealer trick, to get people to tell them what monthly payment they can make."
Although consumers can generally afford the payments, the extended loan lengths destroy their ability to build wealth, she said.
"You end up with a permanent payment in your family budget. ... That's money you don't have for savings or anything else," she said.
Still, things could be a lot worse.
Despite the longer loans, people today pay less in interest — as a percentage of the total cost of buying the car — than buyers did a few decades ago.
While loans have grown longer, extremely low interest rates have made them cheaper.
In the early 1980s, for example, interest expenses made up about 25 percent of the cost of buying a car, even though buyers tended to pay off loans in less than four years.
In 2006, as buyers paid for cars over five years, interest made up less than 12 percent of the cost.
Low rates also could explain why the auto industry has not had the credit problems seen within the home mortgage industry. Some buyers default on loans, but the vast majority can still afford their payments.
Michael Stoller, a spokesman for General Motors Acceptance Corp., said the company has noticed an increase in delinquent loans in recent months, but only a small one: 2.68 percent of auto loans in January, up from 2.61 percent a year earlier. Ford Motor Credit reported similar default rates.
The bigger concern for car makers is that the growing length of auto loans tends to depress new car sales, Stoller said.
Many buyers choose not to buy new cars until the old payment is gone, so an eight-year loan means eight years off the market.
Despite long loans, some people still choose to buy, even when they owe more on their loans than their vehicles are worth — what industry types call "upside down."
Upside-down borrowers don't make great car buyers.
If a buyer owes $20,000 on his car, but it's worth only $15,000 as a trade-in, he'll have to pay $5,000 at closing. Or, more often, he'll add $5,000 to the amount he's financing.
"If you still plan to turn a vehicle in every few years, you won't have anything to put down on a new car," Stoller said.
Toprak, Edmunds.com's economist, said upside-down sales are a big reason automakers have not been able to abandon cash-back incentives on vehicles.
Many buyers need the rebates to pay off their old loans, he said. That means companies that traditionally didn't offer big incentives such as Toyota find it necessary to help people out of long-term loans. Buyer incentives hurt profits, but not as much as losing customers for nearly a decade.
In December, about 25 percent of buyers were upside down on their trade-ins, Toprak said. That's down from the 30 percent peak in June 2006. For the past three years, the percentage of upside-down buyers has averaged 26 percent.
(Robert Schoenberger is a reporter for The Plain Dealer of Cleveland. He can be contacted at rschoenb(at)plaind.com.)
Not for commercial use. For educational and discussion purposes only.
IMO....longer terms are in-line with increased car pricing.
Mortgage - literally, “until death”
I'm currently driving a 1953 Chevy 3100 (five windows) my dad and I restored. We took 3 years to get it back on the road and I was presented the key on my 16th birthday three years ago. No payments, low upkeep and the insurance is cheap (even for a young pup like myself).
I was taught the value of a dollar and the value of hard work. I now work full time as an officer in the family business and attend college full time.
My ‘98 Crown Vic was bought in ‘99, paid off in 2003, and I’ve been driving payment-free ever since. It’s got well over 150,000 miles now, and is still in perfect working order. Even with the 4.5 liter V8, I average 22 mpg with mixed city/hwy driving.
My next car will be another Crown Vic, but hopefully not for a few more years.
LOL!!
I didn't say I finance anything.......
I said I think when some autos cost 50k.....a longer term is appropriate.
Great attitude.....
Kudos..!!
molon labe
Not mine... my 1993 Conversion Van finally died, bought it in 1998.. 10 years out of it, and if the frame hadn’t rusted out, would still be driving... I picked up a 2002 Minivan with about 60k on in for about 6k.. paid cash, I expect to get at least 5 years out of it and everything after that is icing on the cake.
My 1996 Sebring Convertible I bought in 2000 is still running with 150k on it.. figure I got another year or two out of that one, and even if I don’t no biggie go buy another 5 year old car with abouut 40-50k on it cheap and drive that one till it dies.
Got a buddy who’s got a new Chrysler minivan all the bells and whistles.. its nice, but its nearly 40k.. even if you own that car 10 years, you are paying out 300ish a month not counting maintenance, insurance or taxes for it... and I know that guy will not have that car for 10 years. That’s rediculous. I shoot for cost to purchase/months owed to be about $100 per month.
Your parents must be real proud of you! I sure am.
Ford offered me 0% interest on my F-150, so I took it.
I checked with my bank, and they said they couldn’t do any better than 0%.
True, but a car is a necessity and most people cannot afford to pay cash for a car.
Most people can't afford to pay cash for a $40,000+ status symbol that they think they need to impress people with or boost their self-esteem. Anybody can find a car that looks nice and runs well for under $5000. A strong running beater can be had for $1000. Not much cash to save up.
Bullish! What recession?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.