Car Loans: The Borrow Time Gets Longer And Longer

Bertel Schmitt
by Bertel Schmitt

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.”

Bertel Schmitt
Bertel Schmitt

Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.

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  • Kyree Kyree on Apr 09, 2013

    That can happen when you negotiate the monthly-payment terms and not the actual price of the car....something that I have warned numerous people not to do, and often after it was too late. I have also seen people not put anything down on a new car, and then end up in a position where they can't make the payments and can't sell it because it's worth less than they owe. And would you believe that a good number of the people I've talked to don't actually know their interest rates? It really is sad to me that we aren't by default taught how to purchase big-ticket items like automobiles...

  • Nickoo Nickoo on Apr 09, 2013

    This article is posted in full at yahoo finance. It ties my stomach in a knot to see people taking loans as long as 97 months. Here's a cringe worthy excerpt from the article: "Last month Nakisha Bishop took out a loan to buy a $23,000 Toyota Camry and pay off several thousand dollars still owed on her old car. The key to making it work: she got more than six years—75 months in all—to pay it off. "I had a new baby on the way, and I was trying to keep my monthly payment a little bit lower to help afford child care," Ms. Bishop, a 34-year-old sheriff's deputy in Palm Beach County, Fla., said recently. She pays $480 a month for the 2013 Camry, just $5 a month more than the note on her old car. The car won't be paid off until her 1-month-old daughter is heading to first grade. Ms. Bishop's 75-month loan illustrates two important trends rippling through the U.S. auto industry. Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month." That's insanity, she'll end up paying $480 a month on her car for 75 months for a total of $36,000 in payments on a $23,000 loan!!! Why? Oh Why?!? did she not buy used? I recently bought a 1997 thunderbird v8 with 44k on it. I paid $3400, cash, and pay just at $500 for annual insurance premiums, and that is going with 100k/300k limits, well above the state minimums. My car will do everything her car will do except have 4 doors (which admittedly, would be nice to have as 4 doors are conveniant as heck, but I think I made my point).

  • Ranwhenparked Ranwhenparked on Apr 09, 2013

    I don't know if that was that great of a deal in 1956, either. $56 was a pretty decent chunk of money back then, inflation adjusted to over $466 today. Still, at least you were out of it after 36 months - but, of course, the way cars wore out back then, after 36 months it was probably about time to start over again with a new loan on a new car. At least today your car stands a chance of having many years of reliable service left after the finance period ends.

  • AJ AJ on Apr 11, 2013

    The problem I'd see with a long term loan is one would be underwater for longer, which would be a problem if the car was totaled, or if you want to get rid of it. The five new cars I've bought, I paid them all off in four years or less. It's nice not having a payment go on and on, is my goal. Currently I have three nice cars and no payments. Nice!

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