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]