The Seattle Times reports that it is now taking Americans two years longer to pay off a car loan than it did some 30 or so years ago. And the result has been consumers buried in debt and the car makers operating in red ink.
A typical car loan today is for five years, but some can go on for as long as seven or more years. And it is believed that this will go up even more.
When charts shown to potential buyers at the car dealerships how much one has to pay a month for a three year, five year, and eight year loan, it looks good because the numbers per month are a lot less the further you go out in years. One might think that the interest is higher. But for longer loans, buyers are paying less in interest as a percentage of the total cost of the car than buyers paid a few decades ago. The problem is, the loan has become almost permanent and doesn’t allow consumers to save or purchase something else.
Actually the phenomenon of seeing car loans drag on for more years was becoming a trend way back in 1975. Back then the average car loan required the buyer to pay $523 per month (in today’s dollars) compared to $496 now.
But the longer terms and thus the lower monthly payments allows buyers to make payments in contrast to the recent home mortgage crisis in which homeowners are having problems making their monthly mortgage payments. The vast majority of car buyers are not delinquent with their car payments.
But auto makers take a hit because the longer loans are depressing new car sales. A person who is buying his or her car on an eight year loan means that he or she is out of the new car market until the loan is paid and they are ready to get a new car.
And there is no real incentive for a potential car buyer in this situation to go ahead and buy a new car even if they still owe on their current loan. If, for example, a car buyer owes $20,000 on a car, but it is worth $15,000 as a trade in, then the potential buyer of a new car would have to pay $5,000 at closing. Or he or she may have to add $5,000 to the amount being financed. Doesn’t sound pretty. Yet these so called “Upside-Down Borrowers” are 25 percent of total buyers of new cars.