A Look Back At The History Of Auto Financing

by Derek Kreindler

June 27th, 2013 11:03 AM

a look back at the history of auto financing

Over at Autobytel, Juan Barnett (better known as DC AutoGeek) takes a look at the history of auto financing, originally intended as a way for the common man to be able to afford an automobile some 90 years ago. The most striking thing is how attitudes have changed so dramatically over time.

Initially, bankers were calling for a ban on financing of personal automobiles, fearing that it would lead to financial imprudence. How times have changed.

In a 2008 letter to the Security and Exchange Commission, a collection of automotive finance companies argued against a proposed federal rule that would have made 60 months the maximum term for an automotive loan. The group said “[that the] 72 month term has become the industry standard,” and that it was critical to the American economy to allow banks to determine independently the risk as it relates to automotive loans. They argued that any mandated term limit would cripple the automotive industry. They were probably right.

#AutoFinancing #HighFinance #Loans

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Waterview on Jun 27, 2013

As a banker, I try to guide people with the thought that "just because it's permissable (or being offered to you) doesn't make it a good idea". Thus, while 72 month financing is offered, I believe it (along with leasing) generally pushes folks into more car (read: debt) than is wise. But, as a car-guy, I also understand there are folks who place a nice car (or newer car) at a higher priority and are willing to devote a larger portion of their budget to the cause. That said, if wealth creation is your goal, finance it for a shorter term and drive it 'til the wheels fall off.

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- KixStart on Jun 27, 2013
  
  That's a good thought but how often do you get to provide advice nowadays? My last two loans were handled entirely electronically, no human interaction at all. And many people will go to the finance guy at the dealer, who's going to encourage additional spending, rather than recommend putting the brakes on any transaction.
  
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- Hreardon on Jun 27, 2013
  
  @KixStart Kix - Yet another reason why it is so darned critical that we teach our children responsible finance at home and at school. None of this stuff is rocket science, if anything it's a game of self control and forethought.
  
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- KixStart on Jun 27, 2013
  
  @hreardon I don't think it's "teach" as much as "set the example."
  
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- Waterview on Jun 28, 2013
  
  @KixStart Good question. More often than not, I'm counseling folks after they've gotten themselves into a difficult situation (too much debt and no assets to show for it)and are looking for easy solutions. I've seen folks empty out their IRA's to buy cars, pay for a wedding, etc. -- it just makes my head hurt. Interestingly enough, I would "parse" the situation you described into two parts, 1) the decision to purchase, and; 2) securing the most cost effective financing. Your decision to seek the most cost effective financing (via internet or wherever) is wise. Unfortunately, most folks screw up the "decision" part of the process and purchase a car that is well beyond their means.
  
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- Sgeffe on Jul 01, 2013
  
  @hreardon Damn straight!! I tend to take the value of a dollar, well taught to me, to the extreme, however, since, for example, I firmly believe that a cell phone is a luxury, just as the recent Piston Slap threads showed; I don't need to spend $90/month to be available 24/7 or to surf Facebook, which I can do on my laptop! (See my position on credit cards further up these Comments for another example!) (I am researching prepaid smartphones, however, so I will eventually drag myself into the 21st century, kicking and screaming! :-) )
  
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Big Al from Oz on Jun 27, 2013

The longer a banks can keep a loan going the more money they make. I really do think the period of time is a little to long. If a person can't pay off a car in 48 months logic would indicate that maybe you are spending to much. There are alot of people out there who need to be 'spoon fed' with finances. They just aren't able to make good financial judgement. For the people who want to buy a vehicle over a longer period, there are financial tools available to allow this to occur. Drive what you can afford. As for the auto industry relying on debt to keep afloat, this needs to be addressed. This approach by the finance sector of loading debt to keep economies churning and burning requires a little restructuring, along with governments who do the same thing. Banks influence on economies isn't balanced, the influence isn't proportional to the size of most economies, sort of like unions, small in numbers, but to much power. Banks seem to be the ones calling the shots. Then whine and expect to be bailed out when they screw up, blame the governments for allowing themselves to become indebted. Much the same as the way unions operate.

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- Speedlaw on Jun 28, 2013
  
  Years ago, banks were the adult in the room. They had to be, they held the paper. Today, banks do the deal, take a commission, and sell the paper, so they no longer care if you default. The paper becomes "securitized", sliced and diced six ways-so you now want to sell the biggest loan you can to anyone who can qualify, no matter the result...you won't be there for the default. When that borrower defaults, he can't renegotiate the debt with anyone as there is no one to talk to...your loan is part of a larger package and they'd rather lose the whole thing for tax purposes than renegotiate or forbear even an impossible loan. (This is why a bankruptcy judge cannot change terms for a home loan...business gets workouts every day, but YOU cannot....this is the result of bank lobbying) This is also why you can't adjust the mortgage rate easily...the mortgage process is designed to be as difficult as possible. At least in Auto Lending it is much less cleaner.
  
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Buickman on Jun 27, 2013

Durant created GMAC to extend terms for willing but not able buyers.

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Speedlaw on Jun 28, 2013

Longer terms, and Lease then sell for CPO, are why companies now toss in "free maintenance". I'm sure a significant percentage of folks who lease would never change the oil, etc, as they knew that the car went back in two years and they'd never see it again. This probably showed up in CPO warranty claims so it became cheaper to do very minimal free maintenance (15k oil changes) that eat CPO warranty claims. (I'd love to see an article about this issue...folks who buy a car and NEVER do any work...what percentage ?) The longer terms are a combination of higher prices (when I bought my 2003, gas was $2 per gallon, and let us not discuss my monopoly priced health "insurance") and the fact a new car has a lot more "stuff" than years ago. If the car lasts the longer term of the loan, then it can be a reasonable deal, even if not historically ideal. You pay for a house 30 years but you expect it to last the term of the loan. The game is rigged at the very top, and those of us not at the top 1 % don't determine the music.

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