10.28.2013

More New-Car buyers opt for 7 year loans
USA TODAY
Chris Woodyard

They are trying to keep monthly payments low as car prices climb, but experts are concerned

(Photo: Joe Raedle, Getty Images)
STORY HIGHLIGHTS

More car buyers are financing with loans up to 84 months

Some experts worry that people will owe more than their equity in their cars

But low interest rates and high used-car values are helping to foster the trend.

More new-car buyers are stretching out their loan payments as long as possible — as many as seven years — and experts wonder if the trend is another financial time bomb.

While many buyers remember the days when ads touted 48-month loans, today the biggest growth is coming in loans lasting up to 84 months. That's longer than most people are expected to want to keep their new car.

The longest-term new-car loans — 73 to 84 months — have jumped 25.1% in the past year and now make up 19.5% of total new-car lending, according to Experian Automotive. All other loan-length categories, in fact, have become less popular as buyers shift to longer terms to get lower payments.

The next-shorter category — 61 to 72 months and considered a very long loan only a few years ago — now is 41.7% of new-car loans, Experian says. That's down 3.2% from a year ago, but it's still by far the biggest single loan-length category.

Short loans of 25 to 36 months — the time limit that many financial planners and advisers recommend not be exceeded — fell 24.7%, and the 37-to-48-month loan category was off 2.4%.

The phenomenon marks a turnabout from the Great Recession, when lenders were tight with even shorter-term car loans. Now, low interest rates, near-record low loan delinquency rates, high average used-car prices and cars lasting longer all appear to be contributing to the trend.

Also having an effect: old trade-ins. The average age of vehicles on the road is about 11 years, while the average transaction price of a new vehicle has gone from $25,703 in 2002 to $30,592 now, according to researcher TrueCar.

So people finally trading for a new model might have 11-year-old trade-ins worth nearly nothing, even as they try to buy new vehicle priced thousands of dollars more than when they last bought.

Long-term loans with lower payments might be the only answer for those buyers, even though they'll pay more overall than with a shorter loan.

"It's definitely market driven," says Allen Foster, general manager of Smart Motors in Madison, Wis."Customers want a vehicle, but have a budget to work within." At his big Toyota dealership, 16% of loans now average 72 months or longer, up from 11% as recently as 2010.

At the average new-car interest rate of 3.94%, the monthly payment on a $28,000, 48-month loan would be $631.46. That works out to a $30,310.08 repayment, including the $2,310.08 in interest. Same deal, 84 months: $381.95 monthly payment, for a total of $32,083.80 paid, or $4,083.80 in interest.

Thus, the longer loan costs the borrower $1,773.72 more in interest. That probably understates the real difference, because longer loans often carry higher interest rates than shorter loans.

"You end up 'upside down' (owing more than the car is worth) for a longer time," says Greg McBride, senior financial analyst for Bankrate.com. "You are going to pay down the balance at a snail's pace while the vehicle depreciates rapidly."

Lee Auto Malls, a family-owned multi-brand dealer chain in Maine, is seeing longer-term loans and says it reflects stagnant incomes and tight family budgets at a time when new-car prices are rising.

Customers want to "keep a payment at $300 a month when a car is now $28,000," says Chairman Adam Lee. Finance companies are giving customers want they want, but he says "it scares me."

Lenders say, though, it's not necessarily cash-strapped customers who opt for the longer loans.

"It's people with higher credit" generally, says Toyota Credit spokesman Justin Leach. "A lot get paid off before hitting 84 months."