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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.

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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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An increasing struggle to make the payments

Recent data also show a modest uptick in delinquent auto-loan payments. In last year's fourth quarter, 2.7 percent of automotive loans were 30 days delinquent, up from 2.55 percent at the end of the previous quarter, according to Experian Automotive, a unit of credit-reporting bureau Experian. It also said that 0.84 percent of automotive loans were 60 days delinquent in the last three months of 2007, versus 0.79 percent at the end of the third quarter.

To Experian Automotive, even those percentages are significant. Although "a delinquency rate of 2.7 percent may seem small, when compared with the overall auto-loan market of more than $800 billion, it still represents a substantial amount of at-risk dollars," says Melinda Zabritski, director of automotive credit for Experian Automotive.

The role of auto dealers

For their part, some financiers and others cite a competitive need to offer longer loans – but claim they're not hawking them.

Last August, Toyota Financial Services began offering 84-month loans, says spokesman Justin Leach, because other lenders had been doing so. Without a similar offering, "we lost a small number of our customers.... [So] we decided to offer 84-month loans to our better customers" – those "top-tier customers" with "better credit scores."

Still, Toyota "isn't pushing" the seven-year loans, he reports.

At Ford Motor Credit Co., 72 months is the "outer limit of our standard offerings," says spokeswoman Meredith Libbey. "Anything longer is very rare and done on an exceptional basis," although the company had undertaken a pilot program testing 84-month loans.

And at GMAC Financial Services, 84-month loans are "reserved for special individual cases. But as a rule, GMAC doesn't subscribe to 84-month loans," says spokesman Michael Stoller. Such loans "create a potentially dangerous situation for everyone involved," he explains.

How much longer can car loans be extended? While that issue remains debatable, some observers can't foresee them stretching much further. Given many people's desire to unload cars before their maintenance bills become too high, or their style too outmoded, some experts think 84 months may become a natural term limit, at least for the foreseeable future.

Moreover, the mounting interest in cars priced under $20,000, such as the Honda Fit, Toyota Yaris, or Nissan Versa, may have some impact. Purchasing such comparatively cheaper autos may curb some buyers' need for comparatively long car loans, some experts say.

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