Easy Credit Car Loans: The Perfect Storm Gathers
"And even those who keep paying their [car loan] bills may reach a point… where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has already taken a hit this year from slower consumer spending and higher gas prices." This little tidbit in the LA Times underscores a point TTAC made when GM first offered "Anyone with a Pulse" zero percent financing: easy credit creates short term gain leading to long-term pain. The Times identifies four warning signs that the easy credit chickens are coming home to roost. First, loan durations are growing. "Nearly 45 percent of loans are for longer than six years. Toyota Financial Services and Ford Credit are offering seven-year financing. And a few credit unions are tinkering with the eight-year note." Second, the loan amount is rising. "In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade." Third, more and more customers are "backwards" on their loans, by a larger amount. "Today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold." And fourth, an increasing number of these negative equity car owners are hanging fire on new cars– or simply defaulting. "S&P says delinquencies of more than 60 days on car loans issued this year to borrowers with the best credit are up 20 percent compared to those issued last year." Manufacturers and consumers alike are learning there's no such thing as a free car.
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I agree that the auto loan business has gone out of control and that there are many dumb automotive customers, but I think some people here are missing two points: 1) Not everyone can be expert when it comes to cars. Unless we require every high school student to take 2 years of automotive ownership/financing/maintenance/repair classes. Yes, one can always learn more, but that's true of every subject under the sun. There aren't enough hours in a day/life to make people expert in everything they "need" to know. 2) We can't all 'beat the system' by driving '78 Ford F150 pickup trucks. Part of what makes such old beaters frugal choices is the relative lack of demand. If 5 million people decided suddenly decided they would only buy old cars that can be fixed with simple hand tools, the prices of those cars would skyrocket and it would no longer be a money-saver. Also, what happens to the economy when all those people give up on consumption? I'm sure many of us (myself included) would like to see that happen. But we should be careful what we wish for. The day that occurs will be a major economic collapse. I think that collapse is inevitable no matter what we do, but a large number of people drastically cutting back on their car-buying consumption could certainly catalyze it.
50merc, I don't want to use TTAC as an opportunity to link my own vehicles. Besides violating some of the sacred rules of friendly discourse, it would cheapen a site that has that rare commodity of impartiality. If you're in the Atlanta area, feel free to email Robert Farago and he can offer you my email address. If you want to shoot the breeze, that's what this place is for or you can feel free to email me privately. "Stuff made 50 yrs is way better than the pressed wood crap sold new now a days." Boy is that the truth. Then again a maple canopy bed is just as cheap as that proverbial old truck. If anyone brags to you about their 'antique bed' just point to the nearest manhole (or personhole if you're in Berkeley) and say, "Yeah, they're quite rare these days too aren't they?" Of course, it helps if you're either outside or live in a rather damp and dark homestead.
I knew a guy who owned a local furniture store. He literally had to lower the quality of his goods because customers like to change their furniture before the old stuff would wear out, so most would go for the elcheapo Chinese made stuff over quality built furniture because it cost less. When I was younger, I bought new cars because I didn't know any better, and to be honest, the quality was not as good as they are today. The last two cars I have bought were used Grand Marquis - though from their resale value I must be one of the few doing so. When my wife and I get the baby, I'll be looking for a used small minivan - a short wheelbase stripped Voyager would be perfect, especially since in their wisdom Chrysler no longer builds them new. If I was buying a Honda or Toyota, I'd probably buy new - the used ones cost too much.
Great article , really interesting, hopefully you’ll write many more just like this.Out of curiousity though, where do you get all your information from?Anyways, keep up the great work!