Long-Term Auto Loans Continue to Rise

By Brendan Moore


The Consumers Bankers Association (the CBA) released a new report last month that stated that consumer auto installment loans in the United States continue to get longer and longer. As we noted in a column last year, consumers are increasingly opting for longer term auto loans in order to get the monthly payments they want on increasingly expensive cars and trucks. The CBA report notes that this situation is only becoming worse with the percentage of 72-month or greater installment new-car loans now up to 17% of the total new-car loans outstanding, compared to 7% of the total new-car loans outstanding in 2005.

There was a similar increase in 72-month or greater installment auto loan activity for used car loans for these same time periods.

In 1999, only 21 percent of new-vehicle loans were longer than 60 months, the Consumer Bankers Association says. The trend looks unstoppable with many lenders now offering 84-month loans for those who want even longer-term loans, and many of those same lenders considering adding 96-month loans to their product lineup. These terms are for both new car loans and used car loans.

What does this mean in practical terms for consumers? Here’s an example: A $20,000 vehicle loan at 7.55 percent simple interest for 48 months costs the buyer $7,025 in interest. The same loan, carried over 84 months, at the same rate, costs $13,871 in interest. You can do the math – that’s almost twice as much in finance costs. That’s if you can get your lender to give you the same rate for 84 months as 48 months, which would be unusual. They’re probably going to want a higher rate at that long a term. And at 15,000 (average annual miles in the U.S.) miles a year, that means you have 105,000 miles on the car when you finish paying it off at 84 months (7 years x 15,000 miles), so then it’s probably time to buy a new car.

As we noted in a post titled Maybe You Should Lease Your Next Car in 2006 (Archives, Nov 2006 – to your right), there are millions of people in the United States that are getting extended-term loans simply so they can afford the monthly payments on what they want to drive. The preceding example illustrated that there is very little to no equity in the vehicle at any point during the extended loan term and if the loan goes to full term, then the car is almost without any value by the end of the loan term. These types of borrowers are people that really need to take a long look at being lessees instead – it would be far better to lease the vehicles in question from a financial standpoint for most of them.

And just because we can, we’ll list the big vehicle finance outfits: according to AutoCount, an Experian subsidiary, the top ten auto finance (loan and/or lease) companies in 2006 were:

Ford Motor Credit N.A.
Toyota Financial Services
DaimlerChrysler Financial Services
American Honda Finance
Chase Auto Finance
Nissan Infiniti Financial Services
WFS Financial
Wells Fargo Auto Finance
CitiFinancial Auto

Lastly, we’ll leave you with this: new car affordability is important to consumers and therefore to car companies, auto dealers, and banks. Comerica Bank out of Detroit says that, as of fourth-quarter 2006, it takes 23.6 weeks of average family income to purchase an average-priced new vehicle. That is a decline of almost two weeks from the average amount of time it took in 2005. The affordability index is based on an average cost of $26,500, which includes the loan finance charges accrued on such a purchase. This amount is down approximately 5% from 2005. Conversely, average family income has increased approximately 5% in this same period. Paradoxically, all of these factors contributed to a new car being easier to buy this year.

So, why are consumers going for increasingly longer terms? Even though there has been a decline in the amount of time it takes the average household to earn the money required to buy a new car, that same household is spending more of its same aggregate income on a higher volume of goods; i.e., flat-screen TVs, iPods, vacations, etc. Therefore, the average household is able to allocate less of a percentage of their total household income towards monthly car payments.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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  1. I drive too many miles per year for a lease to be worthwhile, but there’s no way I’d want to hold onto a car for 7 or 8 years and still be making payments on it! People are financing themselves too heavily just to get a car that they really can’t afford as some sort of status symbol, but then they have a 7 year old car, which probably doesn’t (to borrow from VW’s commercials) have high “ego emissions.” Or – they are “upside down” on their 7 year loan somewhere around year 3 or 4, and just HAVE to get the latest and greatest, and get an 8 year loan to get something new, rolling in their negative equity to the new loan, increasing their payment size, and going further upside down.

  2. This is very useful info. The leasing post is too.

  3. I know it probably seems old-fashioned to say this, maybe even quaint, but shouldn’t people buy something they can afford? And I don’t mean being able to afford it by stretching out the payments forever, but affording it by paying cash or financing the car for a maximum of 36 months. If you can’t get the car you want within those rules, then buy a cheaper car or buy a used version of the car you want new. Debt will rule your life if you let it! I know, believe me.

    And as far as I’m concerned, leasing is a scam, plain and simple. You can dress it up any way you want, you’re still just renting a car when you get down to the facts.

    This country would be a lot better off if everyone paid cash for almost everything, and financed the rest for as short a term as possible. A 24mo car loan and a 15yr mortgage, max. And no credit cards. Use a debit mastercard or visa.

  4. lisanh, I can appreciate your enthusiasm for not having any debt, but leasing a car often makes sense for many people, depending on their specific situation. Just like a 30-yr mortgage makes sense for a lot of people. There is no one-size-fits-all personal finance philosophy. It really just depends on the individual’s finances. I am a financial planner, that’s my job, and it wouldn’t be giving my clients the best level of service to just give them those types ofblanket statements about their household finances.

    Leasing a car does make sense for a lot of people. I will say, however, that getting the types of extended term auto loans mentioned in the post doesn’t make sense for any consumer. It’s crazy to get an 84 month loan on a rapidly depreciating asset.

  5. ALWAYS buy a used car, 2 to 3 years old if you’re smart. ALWAYS.

  6. I am 42 year old and have owned three cars so far, and all of those cars had close to 200,000 miles on them when I got rid of them. Not that I would ever get a 72 month loan (I go 12 months usually), but if I did, I would still have a lot of driving left in the car after I paid it off. Almost any car will go a long ways if you just keep after it and don’t let small repairs turn into big ones. People are careless when it comes to maintaining their cars, and then they wonder why it’s worn out at 80,000 miles.

  7. That’s pretty amazing, billravich! You’re definitely not the norm among car buyers, especially nowadays. The fact that you’re holding onto your cars so long after they’re paid off is the reason you’re able to afford a new one with only a 12 month loan. As long as you maintain your car well, it should last 200,000 miles. Unfortunately many folks (myself included) don’t like the idea of driving an older car and get bored with it, and want to move onto something else. If you have the resources to do so without straining yourself financially, then it’s not as bad as folks with upside-down loans for extremely long terms. There’s no practical reason I should trade in my 2004 Honda Accord EX V6 with 56,000 miles, but I’ve had it for almost four years and I’m getting the itch. It will be paid off no later than September 2007.

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