Buying a new car is a big deal. Now, it will be either more, or less, stressful, depending on your point of view. The length of cars loans is expanding, in some instances, to up to 97 months to pay off your car.
"I had a new baby on the way, and I was trying to keep my monthly payment a little bit lower to help afford child care," Nakisha Bishop, a sheriff's deputy in Palm Beach County, Florida, told the Wall Street Journal.
Tje 34-year old's new car, a $23,000 Toyota Camry, will take 75 months, more than six years, to pay off. The monthly payment of $480 is only $5 less than her old car payment, and won't be paid off until her one-month-old daughter is attending first grade.
The new, longer, loan schedule is indicative of two major trends in the auto industry, rising new-car prices and competition among lenders to attract borrowers, which is lengthening the terms of loans, in some cases, by a lot.
Banks see longer terms as a way to attract customers by keeping monthly payments under $500 when the average price of a new car is $31,000, an increase of $3,000 in the last four years.
At the same time, car prices are rising, average car payments have decreased, from $465 to the current $460. Borrowers either don't realize, or don't care that this leaves them paying a much higher price for the car overall at a monthly savings of only $5.
In the last quarter of 2012, the average car loan term had reached 65 months. That's the longest average ever, according to Experian Information Solutions Inc. According to the company, 17 percent of all new car loans in the past quarter were between 73 and 84 months, with some as long as 97 months. This is an increase from 11 percent only four years ago.
Long terms of such lengths are detrimental to consumers. It takes buyers longer to reach the point where they owe less on the car than it is worth. This makes it more difficult to trade or sell the vehicle if the buyer is unable to make the payments.
"It's the same sort of thing we saw in 2007," William White, a former economist at the Bank for International Settlements, told Reuters. "People get driven to do riskier and riskier things."
Car manufacturers are ambivalent about the longer terms. They allow consumers to buy more expensive cars, which are more profitable to the manufacturer, but they also prevent people from replacing the cars they own, which cut into future sales.
Ford Motor Credit, the in-house lending branch of Ford Motor Company, averages terms of between 59 and 60 months.
"We don't want to keep buyers out of the showroom longer than that," said Margaret Mellott, a spokeswoman for Ford.
Beyond the added risk, longer loans keep buyers from coming back as often, said Mellott, echoing the concern of many car manufacturers.
"Generally, the current economic and consumer environment is more favorable for longer terms as compared with prior periods," Ally Bank, the largest car financier, said in a written statement. "The used vehicle market remains strong, current vehicle quality also helps to maintain appropriate values, and consumer credit profiles are improving."
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