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New car loans stretch to greater lengths
More buyers finance for six, even seven years – a risky move given how quickly some cars depreciate.
By Margaret Price | Correspondent of The Christian Science Monitorfrom the March 31, 2008 edition
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When it comes to car loans, Philip Reed clearly wants to practice what he preaches. When he bought his first new car, a $15,700 Honda Fit, almost two years ago, Mr. Reed took out a five-year auto loan that can be paid off early – something he aims to do this year.
"Shorter is better" with loans, proclaims the man who is consumer advice editor at Edmunds.com in Santa Monica, Calif. Indeed, Reed considered a three-year loan term until learning he could repay the five-year loan early.
But increasingly, other car buyers seem less averse to debt. Even as fallout from the subprime mortgage fiasco ripples through the economy, data show available car-loan terms stretching out – even in a few cases, to as long as seven years or longer.
On the face of it, that could mean the loan might last longer than ownership of the car.
"It's crazy," says Julie Bandy, editor in chief of Bankrate.com in North Palm Beach, Fla. Since cars lose value quickly, "you could end up upside down" on a long car loan – meaning the car could be worth less than the outstanding loan on it when you try to sell or trade it in.
Consider some of the more striking trends in auto loan term lengths. On one hand, average durations have crept up modestly over the past five years, to almost 64 months in 2007, according to Edmunds.com. But according to J.D. Power & Associates, the largest percentage of new car loans obtained at the dealership – 41 percent – had durations of 72-77.9 months over January and February of this year. That's up 10 percentage points from the same period four years ago. Moreover, as of this January/February, 4.3 percent of loans from dealerships ran 84 months (seven years) to 89.9 months long, while 0.1 percent of the loans extended to between 96 months (eight years) and 101.9 months.
By comparison, the age of cars now being traded in at dealerships now average 5.8 years, according to Tom Libby, senior director of industry analysis at J.D. Power.
Experts link the elongating of loans to several converging factors: On the consumer side, experts point to rising car prices coupled with people's desire for fancier cars than perhaps they can afford. By obtaining a longer-term loan, buyers can trim their monthly payments, which can help them justify getting the car they want.
On the vendors' side, longer-term financing may help them sell cars, especially in today's troubled economy.
But for consumers, the longer loans aren't necessarily helpful. On the downside, for instance, they can delay the time they can afford to unload their vehicles.
According to Reed of Edmunds.com, they're "generally financed at a higher interest rate, which somewhat offsets the benefit of extending the loan."
Evidently, the longer loans haven't held down average monthly car payments either. Average payments climbed to $484.50 a month in 2007, up from $459.25 per month in 2002, according to Edmunds.com. Over that five-year period, car costs rose, boosting the amounts financed, while the average annual percentage rate on car loans stood at 7.37 percent last year, up 1.59 percentage points from 2002.
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