As ATPs Rise and Loan Terms Grow Obese, Trade-ins Are Less of a Trade-off

Matt Posky
by Matt Posky
as atps rise and loan terms grow obese trade ins are less of a trade off

Auto loan terms have been creeping up for as long as anyone can remember. Back in 1997, the average financing period on a new car was somewhere around 54 months. That crept up to over 60 months by 2004 and has only continued to climb. Over the past decade, the typical automotive loan term has ballooned by almost 30 percent. According to an analysis by Edmunds, the average financing period on a new vehicle sold in the United States surpassed 70 months in March of 2020.

While automakers’ recent introduction of loans extending up to 7 years (especially now that COVID-19 is hampering sales) has exacerbated the issue, we were already sitting on a 69-month average in October of 2019. Why would someone voluntarily agree to such a lengthy agreement? They may not have much of an alternative due to similar growth in vehicle transaction prices.

Despite wages stagnating in the U.S., manufacturers and their customer base alike have embraced SUVs with higher price tags and meatier profit margins. This has left most dealer negotiations concluding well above $37,000 per car, with payments averaging $573 per month.

While some have benefited from declining annual percentage rates (APR), with some well-qualified customers eligible for zero-percent financing, that isn’t the case for everybody. Edmunds reported that 13 percent of car buyers earned an APR of at least 10 percent in March — a 2-percent increase in buyers from February.

“Vehicle purchases made in March — particularly the second half — were likely need based,” explained Jessica Caldwell, the executive director of insights at Edmunds. “These shoppers might not have necessarily qualified for zero-percent finance offers but still needed a car in spite of everything else going on in the world.”

But having (or wanting) to buy a vehicle doesn’t change a situation where increasingly more consumers go into new purchases with negative equity. Roughly one-third of buyers who traded in old cars to buy new ones in the first nine months of 2019 were in this camp, compared with 19 percent a decade ago. These borrowers still owed around $5,000 after they traded in their cars before taking on new loans.

Just 5 years earlier, that balance was roughly $4,000. You can blame lenders for allowing this practice, employers for tamping down earnings, customers for buying beyond their means, and automakers for prioritizing expensive vehicles. They’re all guilty to some degree and will undoubtedly be individually blamed in dozens of think pieces when this situation implodes. Considering that we’re entering into a period of economic uncertainty, with recession/depression alarm bells sounding, it’s probably only a matter of months.

Let’s hope defaults are kept to a minimum and the economic impact stemming from the coronavirus pandemic is at least semi-manageable. No one is interested in reliving 2008.

[Image: Tero Vesalainen/Shutterstock]

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  • ToolGuy ToolGuy on Apr 09, 2020

    "I know I'm not supposed to like muscle cars, but I like muscle cars." - Joe Biden Life lesson from our next President: Forget paying for your own vehicle - have you old man down at the dealership hook you up with a new Corvette as a wedding present. Then years later, maybe your kids will have the engine rebuilt for you. See? Easy!

  • Alien1979 Alien1979 on Apr 10, 2020

    First time post here. I would like to offer a recent example of how buying used saved me a ton of money. Always wanted a Fiat 500 Abarth, but did not want to eat the massive depreciation. Just picked up a 2013 with all the options I wanted for $7200 with 75k on it and some documentation. Put another $2000 into it replacing the wheels, tires and fixing small stuff. Original owner paid almost $30k for it in 2013. In fact, he complained to me how much he had lost on the car. It isn't perfect, but close enough. It is a second car for me so not daily driven. BTW, it took me many years to learn these lessons, but better late than never.

  • Cprescott The pandemic changed the sales game. No longer do dealerships need inventory. After two years people are accustomed to having to order what they want and then extorted on the price by the dealer for that privilege. Now used cars with 75k are selling for $5k more than I paid for my 21k, 2016 model back in January 2019. I pray my car won't get totaled and I have but 13 payments left to make on it. I may never buy another car again.
  • Grein002 I hope you meant "take the Ranger out behind the *barn*" rather than "bar". I think something completely different happens "behind the bar".
  • Cprescott Suddenly there is no reason to buy ugly anymore. The Silverdodo is dead. Long live the less hideous Colorado.
  • Cprescott Portable BBQ's for everyone!
  • Lou_BC The 2023 ZR2 is burdened with GM's 8 speed. It's been allegedly "fixed" so it doesn't gear hunt and shudder. I still won't trust it. The turbo 4 cylinder should address the lack of torque found in the V6. I test drove a full-sized Trail Boss. I could make it gear hunt. The turbo 4 didn't seem to be lacking in power, at least for an empty crewcab with a 6.5 box. It lacked anything resembling character. It had next to zero compression braking even with tow/haul engaged. Chevy should have continued offering the VM Motori based inline 4 diesel that's in the older Colorado trucks. I do like the fact that the 2023 comes with 33's standard and IIRC the wheel hubs/axles etc. have been beefed up to handle the larger rubber. The bolt pattern (IIRC) is shared with fullsized 1/2 tons opening up one's choice for aftermarket wheels.