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

Matt Posky
by Matt Posky

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]

Matt Posky
Matt Posky

A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.

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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.

  • Daniel J Until we get a significant charging infrastructure and change times get under 10 minutes, yes
  • Mike I own 2 gm 6.2 vehicles. They are great. I do buy alot of gas. However, I would not want the same vehicles if they were v6's. Jusy my opinion. I believe that manufacturers need to offer engine options for the customer. The market will speak on what the consumer wants.For example, I dont see the issue with offering a silverado with 4cyl , 6 cyl, 5.3 v8, 6.2 v8, diesel options. The manufacturer will charge accordingly.
  • Mike What percentage of people who buy plug in hybrids stop charging them daily after a few months? Also, what portion of the phev sales are due to the fact that the incentives made them a cheaper lease than the gas only model? (Im thinking of the wrangler 4xe). I wish there was a way to dig into the numbers deeper.
  • CEastwood If it wasn't for the senior property tax freeze in NJ I might complain about this raising my property taxes since most of that tax goes to the schools . I'm not totally against EVs , but since I don't drive huge miles and like to maintain my own vehicles they are not practical especially since I keep a new vehicle long term and nobody has of yet run into the cost of replacing the battery on an EV .
  • Aquaticko Problem with PHEV is that, like EVs, they still require a behavioral change over ICE/HEV cars to be worth their expense and abate emissions (whichever is your goal). Studies in the past have shown that a lot of PHEV drivers don't regularly plug-in, meaning they're just less-efficient HEVs.I'm left to wonder how big a battery a regular HEV could have without needing to be a PHEV.