When Lee Iacocca was a Ford regional manager, he helped pioneer auto loans. Consumers could buy a 1956 Ford for 20% down and $56 a month. The loans were paid off in just 36 months. In the final quarter of 2012, the average term of a new car note stretched out to 65 months, says Experian. 17% of all new car loans in the past quarter were between 73 and 84 months. A few were as long as 97 months. This trend bears huge risks for consumers and industry, says the Wall Street Journal.
The average price of a new car is now $31,000, up $3,000 in the past four years. To keep payments under $500 as month, loan terms get longer and longer. Says the Journal:
“Such long term loans can present consumers and lenders with heightened risk. With a six- or seven-year loan, it takes car-buyers longer to reach the point where they owe less on the car than it is worth. Having “negative equity” or being “upside down” in a car makes it harder to trade or sell the vehicle if the owner can’t make payments.
Car makers have mixed feelings about long-term loans. They allow consumers to buy more expensive—and profitable—cars. But long loans may keep some people from replacing their cars, cutting into future sales.”