New car and truck loans have ballooned to an average of 5 1/2 years from four to five years not long ago, allowing buyers to afford more expensive vehicles and fulfill their urge to drive the newest thing now, reported The Detroit News.
Auto industry analysts say that longer term auto loans — some for seven years or longer — have helped fuel robust growth in new car sales.
Car shoppers who can afford $320 a month can get into a 2015 Ford Fiesta SE hatchback with 10 percent down on a four-year loan at 1.9 percent. But put 10 percent down on a 2015 Ford Fusion SE and you can get a bigger car for just $358 a month when you finance over six years at 4.9 percent.
But the increasing prevalence of the six-year-plus terms has led some industry observers to question the practice. With a seven-year car note your baby in the back seat will be well into elementary school when the vehicle is paid off.
And while the average car on the road in the U.S. is more than 11 years old and quality is improving, consumer advocates remind buyers to do financial research and weigh options and preferences before signing on the dotted line on a lengthy loan.
Michael Logue, a business operations manager from Castle Rock, Colo., and his daughter Shaylee Smith are using a six-year loan to finance a 2014 Mini Countryman S “with all the bells and whistles.”
With a price tag of about $38,000, Logue, 50, and Smith, 26, financed the car this spring under a 72-month term.
“It was due to the cost, to keep the monthly payments at a reasonable level,” he said in a telephone interview. “This was kind of my daughter’s dream car.”
Logue said payments are about $650 a month and he is expecting his daughter will drive the car for 10 years or longer.
Several automakers this month are dangling zero-percent financing for 72 months, including Ford Motor Co. and General Motors Co.’s Chevrolet brand, which also is advertising no payments for 90 days. Chrysler Group LLC is offering zero-percent financing for 72 months or 60 months on some vehicles, and has a 90-day no-payments offer. Toyota Motor Corp. and GM’s Buick brand offer zero-percent for 60 months on some cars.
It’s not uncommon for some dealers to offer buyers 96-month financing — that’s eight years to pay off a car. Nearly a quarter of loans are for longer than six years and up to seven years.
Morgan Stanley auto analyst Adam Jonas sees a problem with record auto loan terms and average transaction prices. High prices are fueling automaker and finance company profits, but Jonas thinks the phenomenon is borrowing demand from the future. Car buyers think they can afford a bigger car given low interest rates and longer terms, so they’re opting for the “tech package with all-wheel drive and luxury interior,” Jonas said.
“It gives the optics of improved pricing and volume, when all you’ve done is pulled forward profit from the future,” he said in a telephone interview.
Some automakers such as American Honda Motor Co. Inc. frown on resorting to hikes in subprime lending and 72-month loan terms to increase sales. John Mendel, executive vice president of the automobile sales division for American Honda, said Honda has no plans or desire to follow those approaches, yet remains on track to hit all-time record sales in the U.S. this year.
