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.
I'm not a good customer. I've owned American and Japanese cars and just took car of them for 10 years. Four years was the maximum loan I've ever taken though.
My current stable:
1997 Honda Accord
1999 Toyota Sienna
2002 Toyota Camry
Cars last 6 years now. I paid off my 1986 T-Bird after 6 years and drove it 13 years.
I read that that Americans drive their cars for an average of 10 years. The reason being is cars are just built better these days.
I buy cars that are 3-4 years old but still have a few miles left on the warranty so I can get them fixed if there is a major issue. I pay cash then drive them until they fall apart.
I suppose the government will just have to bail out the consumers on this too? Too much greed isn't good for the economy so I suppose Bush will have to come up with something for that too. LOL!
No one forces anyone to purchase things they can't afford.
***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.***
Fourty to fifty years ago you could only get car loans at the bank.
The rules were..If it was a NEW CAR you could get a 24 month loan. If it was a USED CAR you could only get 18 month loan. State tax included in both loans..
And that was AFTER a down payment of about 20% that came out of your pocket.
Previous to the Camrys, we had a Tercel from it's birth in 1980 right up until 1997
**We kept the Japanese manufactured Camry and sold the Americanese, as it turns out the one made in the Land of the Rising Sun was much superior in several respects.
The government should just pass out 1 mil to every family. That way we can all afford to buy a home and 1-2 new cars, ipods, plasma tv’s, computers, etc.\ (sarcasm alert needed?)
That's true. Remember -- back in the day -- when you used to see cars trailing blue smoke all the time ... and, lusting for a ring and valve job, I owned a few of them. Now, you almost never do.
I’m not a good customer either: We paid off our SUV and write a check to ourselves each month instead. We bought our family luxury car used (with a warranty) and saved a bundle over brand new.
I love cars, but I don’t love throwing money away.
This 72-84 month financing is to the auto industry what sub-prime mortgages was to the homeonwer undustry.
I well remember what Mitsubishi’s zero zero zero financing plan did to Mitsubishi. And even if you paid cash for a Mitsubishi the value was less than half of a comparable Honda or Nissan.
Why not finance over, say, 5 years? Assuming you plan to keep the car at least that long, and the interest rates are (as they have been) negligible. I financed my current car (less the $10,000 in cash I put down on it) over 5 years at 1.9% APR - the financing is costing me very little, and my monthly payment is minimal. And I got incentives and discounts on the car when I bought it, too.
I’ve already decided, though - my next new car will be a used car. Let some other pay the 20-40% depreciation that occurs over the first couple of years, leaving me with a practically new car for a bunch less money. I must admit I’m not super thrifty, though - I’ve developed a taste for nice cars, not just basic transportation. I’ve had enough of those over the years.
As someone said, “I buy a car every 15 years whether I need one or not.”
I celebrated 200,000 miles and my 9 year anniversary last month with the old Jeep Cherokee.
Yep! I'm currently driving a Ford p/u that I bought for $1000. I was going to keep it long enough to find something a little nicer but it just won't die! I finally put new tires on it because it still starts every morning.
I'm loath to get rid of it. There's a lot to be said for driving an eyesore. I never lock the doors. Nobody's going to steal it. If it gets dings and scratches, I'm not going to cry. Insurance is $35/month.
I'm in the market for something a little newer and nicer but I still plan on paying cash for it. I've gotten spoiled by not having a car payment and paying next to nothing for insurance. It is a practice I'll maintain.
We bought a Toyota Highlander that was one year old and had only 14K miles on it and paid $5000 less than the people who bought it new just one year ago. The thing is so clean you would swear it was brand new.
1998 Toyota Camry
1999 Toyota Camry
2007 Toyota Corolla
2007 Toyota Highlander.
We have a mini-dealership in our driveway at suppertime every night!!
Same here. I get either a 2 or 3 year old off-lease car. They're usually half of MSRP.
Instead of driving until they die, I go to about 75,000 or 80,000 miles and then trade-in and pay the difference with cash.
I will make an exception when a plug-in hybrid comes out by a major manufacturer. I will buy one of those brand new and then buy a solar panel for my roof and battery bank for storage. Then I can shove it in the faces of my faux-green co-workers who want to do stupid things like ban plastic bags at the grocery stores in order to "save the planet".
I had to bite the bullet and get a loan for a little over 9K for the balance to buy my wife a car last August. The loan officer said just go ahead and get the 5 year term because there’s no penalty for paying the loan off early. I paid it off a week ago today. Grand total of $155 in interest paid on the life of the loan.
It took me eight years to pay off my truck that I bought in 1995. Five years initially with a balloon payment, then I had to refinance the balloon payment for three more. I wasn’t real bright.
Fortunately, I’ve sort of made up for it by keeping the beast on the road for five years after paying it off. 161,500 miles, looks like hell, but she’s still going.
}:-)4
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