Detroit Pushes Long Loans for Trucks and SUVs

Will the extra-long vehicle loan be the salvation of the SUV or simply offer false hope?

By Brendan Moore

08.01.2008

Now that the American car companies have decided to effectively stop leasing pickups and SUVs, they’re hoping they won’t lose sales because of it and people will just finance their vehicle with a long-term installment loan.

Well, maybe.

Consumer auto installment loans in the United States have continued to get longer and longer over the last decade. As we noted in a column last year, consumers were already increasingly opting for longer-term auto loans in order to get the monthly payments they want on increasingly expensive cars and trucks. Its worth noting that this situation was only becoming worse before the leasing meltdown with the percentage of 72-month or greater installment new-car loans now up to 19% of the total new-car loans outstanding, compared to 7% of the total new-car loans outstanding in 2005. What is it going to be if the domestics get their wish and would-be leasing customers switch to extended-term loans?

It’s also worth noting that there was a similar increase in 72-month or greater installment auto loan activity for used car loans for these same time periods.

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.

So, maybe those long auto installment loans will keep increasing in length, and maybe they’ll become more widespread. But consumers should be aware that, just as in the rest of life, it pays to know what you’re getting into when you sign that l-o-n-g contract. You may want to do a little math beforehand because the amount paid in interest looks kind of scary on, say, an 84-month loan.

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. And that’s for an inexpensive $20,000 new car! A new $40,000 SUV racks up even more breathtaking interest amounts, as you can imagine.

I have to believe that some percentage of people that actually still want an SUV (which is an ever-shrinking number to start with) will just say “no thanks” when they look at those interest charges on a long-term loan.

It’s going to be a tough sell to get people to take out an installment loan (and pay a lot of interest) for a long period on a vehicle that they used to be able to lease for a short period for the same amount per month, and, get another new one of whatever they’re leasing in their driveway every 36 months. That is going to be a tough sell.


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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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5 Comments

  1. Man, too much interest to pay on a car. No way I’m getting an auto loan with that many months.

  2. If people actually did the math on things, they would buy half of what they do, and they especially wouldn’t buy it on credit. Americans rarely “do the math” when it comes to purchases on credit.

  3. I agree with Anonymous – it’s really insane how people often will even buy something on sale, but then don’t care about the interest that builds up. Insane!

  4. I think Chrysler is kidding themselves if they think that loans will replace leases for the part of the population that really wants a lease, whether that’s a business or a consumer. These customers will still lease. They just won’t lease a Chrysler product, that’s all. Thre are plenty of other choices for them.

  5. Ridiculous! People that want or need to lease are still going to lease. They’re not going to take out a loan just because Chrysler is pushing them that way. They want to lease! As the previous comment pointed out, so what if they can’t lease a Chrysler product? They’ll just go lease something else. Same thing with Ford or GM customers. Plenty of choices, lots of options available in the market.

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