By on July 16, 2021

As you’re undoubtedly aware, now isn’t the best time to purchase a new vehicle. While you can currently sell your ride for more than it’s realistically worth, the economy is anything but stable as inflation and supply shortages gum up the works. A lack of semiconductor chips has caused the automotive industry to stutter endlessly throughout 2021, with the issue getting so bad that some manufacturers have been building unfinished vehicles just to give their employees something to do. Ford is even mulling over a strategy to ship those units directly to dealerships so they’ll have something on the lot — effectively making its retail network responsible for final assembly.

But the logistics nightmare is only part of the story. Automotive loans are also becoming untenable as terms stretch out endlessly. Cars continue getting more expensive and the average consumer is losing their buying power. The preferred solution is for financiers to extend agreements so customers can continue making the same monthly payments while accruing more on interest over the duration. While effective in the short term, and bound to make banks money as we’re all driven deeper into debt, one wonders how this plays out on a grander scale. 

History would suggest rather poorly.

America’s last big recession wrapped in 2009 and was preceded by swelling prices and lengthening loans. But the average terms on a new vehicle had been tamped back down to 63 months by 2010. They’ve been climbing back up ever since and are now surpass 70 months. According to the U.S. Department of Labor, used automobiles were 45 percent more expensive in June 2021 than they were in June 2020 while new cars saw an almost 6 percent increase over the same timeframe. But businesses have managed to keep monthly payments from getting out of hand by extending terms. You’re still paying more overall, but you’ll feel less of a sting every four weeks.

Blame COVID restrictions, increased regulatory pressure, predatory lending tactics, a chip shortage created by mismanagement/our own obsession with electronic devices, and the industry burning tons of money in service of chasing down electrification and the nebulous concept of “mobility.” They’re all to blame but the economy has also taken a pretty savage turn in general and it’s making a lot of people nervous about the future, including The Wall Street Journal.

The outlet recently published a study noting that this change has been particularly hard on the bottom rung of our economy. Longer duration loans are being offered to subprime borrowers and ultimately results in their paying more for the same product than someone who could afford to place more cash on the table and make larger monthly payments. However, the subprime and deep subprime segments now appear to be abandoning the market altogether.

From WSJ:

A 2018 analysis from Moody’s Investors Service showed that the cumulative losses of longer-term prime auto loans (those 72 months or longer) originated between 2003 and 2015 were two to five times higher than shorter-term loans originated during the same period. That is partly because longer duration loans tend to go to less creditworthy borrowers, according to Moody’s. Credit profiles of car buyers do look better today and consumers have more saved up thanks to stimulus payments and spending less during pandemic lockdowns. The average credit score for both new and used car buyers has increased since 2016, according to Experian. The share of prime lending has also increased over that period, while subprime lending is near record lows.

The flush bank accounts of car buyers is helping some of them make deals involving more cash. Loan-to-value ratios for car loans have “come in better as people are putting in more cash on the deals,” Santander Consumer USA Holdings’ chief financial officer, Fahmi Karam, said on the lender’s earnings call in April.

High used-car prices have also meant that lenders could command higher prices for the repossessed cars when loans default. Auto defaults were at a 10-year low as of May 2021, according to the S&P/Experian Auto Default Index. Recovery rates for auto asset-backed securities reached all-time highs in April, with prime recoveries rising above 100 [percent], according to S&P Global Ratings. Declining car prices will likely have the opposite effect.

But the outlet remains generally optimistic, suggesting that the swap to trucks and crossovers means the average automobile will be better at holding its value. Vehicles are also being retained longer than ever before, with the average age of roadworthy light vehicles now surpassing 12 years. While we would like to attribute that entirely to the industry providing increasingly durable cars, U.S. sales growth has been trending in the wrong direction — much like it did ahead of the Great Recession.

With Americans buying fewer cars per year, it’s not surprising to see the average vehicle age increase. It’s also not necessarily indicative of modern automobiles being more robust, though that likely plays a factor. Many are undoubtedly holding onto vehicles longer now that buying something else is becoming prohibitively expensive for a subset of the population. The middle class was already shrinking in this country, with the last couple of years representing the greatest upward transfer of wealth in modern history. Adding a few hundred more billionaires to the roster means a few thousand more six-figure automobiles get sold. But culling the wealth of millions of middle-class consumers means many of them have to pass on buying the vehicles that actually keep the industry humming.

[Image: Pathdoc/Shutterstock]

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32 Comments on “It’s Not Just Pricing, Auto Loans Are Also Getting Out of Hand...”


  • avatar
    28-Cars-Later

    This is news? 84 and even 96 month terms started to come into vogue three or four years ago on new cars. I’m waiting for notes to break triple month figures.

  • avatar
    jack4x

    This is the rare sweet spot where inflation is high but interest rates haven’t caught up yet.

    Savvy consumers who can actually find something they want to buy have almost never had it better. A lengthy loan at 3% in a 5% inflation environment means you’re being paid to borrow money.

    The poor getting screwed, while regrettable, is certainly not unique to 2021.

    • 0 avatar
      Scoutdude

      Yup the smart money is getting in now.

    • 0 avatar
      jalop1991

      At the end of April I bought one of the last of the shrinking pool of Chrysler minivans right before the world shut down. Nice dealership, overall superb experience, but I do have to say that the sales manager’s first pass at me involved an 84 month term. I took that to mean, he assumes all of his customers are looking for a low monthly price.

      Anyway, we did a little bit of a dance–me to make sure he understood who I was, which included showing him a few versions of whatever my credit card companies thought my credit score was, which overall was something like 847 out of 850–and to his credit he recovered quickly. I told him, I’m not worried about buying money. I knew I could get 1.24%, but that would have to be from a TrueCar dealer. And I do max 5 year loans.

      I guess that goosed him–well, that plus my $10K cash down payment (I wasn’t trading anything in)–and he sure didn’t want me to leave the lot. Before you know it, he came back with 0% from Chrysler Capital.

      I said, “but the published deal is either that 0% OR the Chrysler cash on the hood.” He said, “Nope. This is for the deal as it sits on paper right now, including the cash back from Chrysler. I just ran it all past Chrysler Capital, and this is what they gave me. 0%.”

      I was a bit stunned, but I took it. I think there might have been more dealer cash on the hood available, but this guy did his job well and that 0% ended up being a decent amount saved. My wife really wanted that particular van, so I just signed.

      0% financing plus the $5K factory cash back. Huh. Yeah, I guess so.

    • 0 avatar
      28-Cars-Later

      Getting “paid” to overpay for a vehicle?

      • 0 avatar
        ToolGuy

        @28,
        Debt makes everything better.

        • 0 avatar
          jack4x

          Debt is a tool.

          Like any tool, it needs to be used responsibly, but people who refuse to use it at all are just making their life harder.

          • 0 avatar
            APaGttH

            @jack4x

            This.

            Exactly this.

            The super wealthy are wealthy in part because they leverage debt using their wealth to secure it.

      • 0 avatar
        jalop1991

        Detail? Who “overpaid” for a vehicle?

        I can make the argument that every car YOU bought, you overpaid for–because the guy you bought it from let you drive away with it.

        • 0 avatar
          ajla

          Are you arguing that incentives and dealer discounts aren’t much lower today than they were in 2019 and early 2020?

          Yes, trade in values are also up and if you are trading in something like a Colorado diesel then maybe you’ll come out ahead depending on what you’re buying but for someone trading in a Cruze or Sentra or *nothing* it is a different situation.

          • 0 avatar
            jalop1991

            “The super wealthy are wealthy in part because they leverage debt using their wealth to secure it.”

            Exactly. But people without resources, people who live hand to mouth and wonder what they’ll do if they retire, will never understand that.

          • 0 avatar
            jalop1991

            “Are you arguing that incentives and dealer discounts aren’t much lower today than they were in 2019 and early 2020?”

            Nobody should be arguing that. It’s simply not true.

            For grins, I went and looked at some vans just like mine in the market. Chrysler has increased the sticker price $2K to $5K depending on equipment, and has withdrawn all incentives. My van that I bought at the end of April now prices out at least 15% more than it did back then, apples to apples.

        • 0 avatar
          28-Cars-Later

          Nice, but I could show you data otherwise for nearly every purchase.

    • 0 avatar
      thornmark

      savers are getting screwed

      poor, middle class or rich

  • avatar
    PeriSoft

    Everyone keeps saying that “cars are more expensive”, when really what’s happening is that people are able to buy more expensive cars. That means the opposite of what you think it means! You can buy a normal 1990s-style midsize sedan for $22k all day long. Accords, Camrys, Sonatas, whatever. You can replicate the same purchase you made then, get double the car – in terms of longevity and performance and features – and pay less, inflation-adjusted.

    People *aren’t* doing that, because apparently they don’t *want* to. But cars are cheaper than they ever have been for equivalent form factor, quality, and performance.

    I saw a breathless article on some blog about how the “average car” is now $40k, which means that “people are priced out of the market” – as if everyone is required to go out and buy a $40k car because some other people bought $140k Panameras and $65k F150s.

    Yeah, if you want a plush crossover with the features of a 2009 S-class, you have to pay $40k. But that’s not the minimum entry-point to car ownership, or even damn-good car ownership, and the fact that so many people are willing and able to buy better-than-necessary cars that will last long enough that you can get a 72 month loan and have still 10k in equity when the car is paid off is, economically speaking, a good thing! It’s honestly baffling to me.

    • 0 avatar
      ajla

      “the fact that so many people are willing and able to buy better-than-necessary cars that will last long enough that you can get a 72 month loan and have still 10k in equity when the car is paid off is, economically speaking, a good thing”

      You will have to show your work on that one.

      • 0 avatar
        PeriSoft

        @ajla

        “You will have to show your work on that one.”

        Well, look at the alternative. In India, the average new car transaction price is around $10k. Does that mean things are great for consumers there, because they’re all buying cheap cars? Or does it mean that Indian consumers can’t afford more expensive cars?

        If it had become impossible to acquire transportation for under $40k, that would be awful for a big swath of consumers. But that isn’t what’s happening, even for crossovers. I could walk into a local dealer and buy a $25k Hyundai Kona that, while it’s not the most exciting thing in the world, is reasonably safe, fits a bunch of people, carries some stuff, and has tech features and general build quality far in excess of those available on any equivalently-priced midsize sedan from the early 2000s or 1990s.

        The fact that more people have the ability to buy nicer stuff is the opposite of a problem.

    • 0 avatar
      theflyersfan

      Exactly. You can get the same tech features in a $26,000 2022 Civic that comes in a $36,000 CR-V. Usable passenger space is roughly the same – 4 comfortably, hate to be the the 5th in the middle, decent gas mileage, turbo engine, etc. But the earlier marketing of crossovers combined with society’s shift (getting older, perception of needing more cargo space whether or not they will use it) away from cheaper sedans meant the automakers can now print money with CUVs.

      A Versa or Mirage might not be an auto fan’s idea of a good car, but for a commuter car on a budget, they’ll do fine. But if you have to stretch above 60 months just to get something that you think will impress the neighbors or something you don’t really need, well, the possible financial ruin…look in the mirror for the cause!

    • 0 avatar
      96redse5sp

      The reality is, that so many people are willing to buy more expensive than necessary vehicles that they can’t afford – like $60,000 pickup trucks that will never go off-road or see a construction site. These are not better vehicles than Camrys or Accords or even Fusions – just more “on-trend” and more expensive. Most of these vehicles are NOT sound investments…. You’ve fallen into that trap of actually believing that more expensive = better vehicle.

    • 0 avatar
      96redse5sp

      The reality is, that so many people are willing to buy more expensive than necessary vehicles that they can’t afford – like $60,000 pickup trucks that will never go off-road or see a construction site. These are not better vehicles than Camrys or Accords or even Fusions – just more “on-trend” and more expensive. Most of these vehicles are NOT sound investments…. You’ve fallen into that trap of actually believing that more expensive = better vehicle.

    • 0 avatar
      thegamper

      There are lots of inexpensive cars out there but they are in the used market. Or I should say there used to be, even used cars are getting pretty expensive.

      I think a big issue with extended term loans is really related to consumer tastes. It has to be big, it has to have AWD, it has to be tech laden, etc. There are inexpensive “new” cars still on the market, but nobody wants them.

      So is it the automaker’s fault that consumers are demanding more expensive cars? You cannot blame the automakers for dropping inexpensive models that nobody bought and that they couldn’t make any money on when they were selling.

      I personally think that America in general needs to have more reasonable and managed expectations. When I was looking for a used car for my son, I was basically looking for something cosmetically perfect, low miles, running perfectly and all for basically free. Reality quickly set in.

      I always get a kick watching HGTV seeing these couples who have mile high expectations and a tight budget. “So I have $300,000 to spend and I want a house on the water, near downtown, completely updated, minimum 4000 square feet.” Good luck with that. If you “have to have it”, and you are priced out of the market, no matter what it is, the only solution is to borrow at lengthy loan terms. The American Consumer has been spoon-fed this entitlement culture and it builds until it bursts. It is the new economic cycle.

  • avatar
    NJRide

    All depends now on Vehicle Miles Traveled and how fast the electrification shift happens. I do think if remote work continues for a certain subset of the population that could stifle VMT growth and cause sales to plateau or drop to a slightly lower baseline. Electrification is a toss-up depending how fast it goes and how it is implemented.

    The one thing I do believe is that there is an age limit to cars and I don’t expect the average age or death age to keep increasing. Based on my calculations, the median car is junked at about 18-19 years old. As we move more into the era of more electronics I think that becomes a ceiling and possibly even drops slightly.

    Also what is the real needed “replacement rate?” If its 17 million the Great Recession cliff of 2008-11 is affecting older used cars. If its 15 million 2013-19 made up for it and then some.

  • avatar
    gasser

    +1 on the point that more and more auto electronics will begin to LOWER the average age of on the road vehicles. Cars get junked when something breaks that costs too much to justify the investment. Electronics are proprietary, expensive and don’t do well with wild temperature swings. I just don’t see all of these screens, safety nannies and multipurpose ECUs lasting 12+ years into the future. Maybe for very popular cars some company will develop work arounds or replacement parts, but an awful lot of what we are buying today will not stand the test of time.

  • avatar
    SoCalMikester

    generally, first generation electronics are overbuilt and robust. parking sensors have been around for a while, and i havent heard about issues with those. aside from the whole takata thing, airbags will last a long time without going bad.

  • avatar
    Jeff S

    With modern electronics most of today’s vehicles will be lucky if they last 12 years especially since the manufacturers go for the cheapest suppliers and especially if the parts supplied are Chinese made that often means significant cost cutting and little quality control. Also more vehicles are getting totalled when in accidents due to expensive electronics and air bags. Manufacturers have little incentive to make vehicles that last longer since a longer lasting vehicle means less new vehicles replaced even if many of the older vehicles are bought and owned by those who did not buy them new. Appliance makers have for years perfected obsolescence with most of the appliances made today appliances barely lasting 10 years without major repairs. Some manufacturers have even unofficially lowered the expected life of their appliances to 7 years.

    • 0 avatar
      NJRide

      Yes I think the industry has blundered in the “Milk more out of the cow less often” scenario that they have played the past 20 years. That may even be why they are not resisting EVs because maybe they think something different can break that cycle. Also the US could help with climate change and the economy by legislating older cars off the road without expensive mods. In NJ, pre 1995 cars dont even need a tailpipe inspection and somehow I think a modern car makes less smog than even a 20 year old one. If stuff like this was implemented you could probably jump to 21-22m sales a year but sedans would probably make a slight comeback.

  • avatar
    SCE to AUX

    Don’t expect the mfrs to care about these trends.

    They are just going to build vehicles that people buy, without concern for the people who *can’t* buy them. That’s what the used car market is for.

  • avatar
    Jeff S

    There might be fewer used vehicles available especially affordable ones. Agree that most manufacturers don’t care and the loan periods will continue to expand but eventually it will reach a point where the loan period cannot be expanded anymore because the loan cannot be expanded beyond the average life of the vehicle.

    I doubt the Federal Government will legislate older vehicles off the road but in the larger metropolitan areas local, county, and and state governments could. The Federal Government could offer a program similar to the Cash for Clunkers that offers additional money to buyers of EVs to trade their older less efficient ICE vehicles for a new EV. There will still be some classic and antique vehicles still around but those are not usually driven on a daily basis. Many of the newer vehicles today with their more complex electronics and air bags will not survive as long as those of the past 20 years so older more polluting vehicles on the road will be less of an issue as it has been. Many of the older vehicles still on the road today are much cleaner and more efficient than those older vehicles 30 or 40 years ago and that trend will continue. Higher fuel prices and higher repair and maintenance costs will take more aging vehicles off the road even for those who cannot afford to buy new because after a period time it is cheaper to buy another used vehicle than to put more money into your present vehicle especially in colder areas where salt and road chemicals are used to treat roads in the Winter. It is getting harder to find any body shops that will repair rust on vehicles with most body shops making most of their money on collision damage on newer vehicles. Many body shops don’t want to even give you a quote on repairing an older vehicle unless it is a classic restoration and then that is very expensive.

    • 0 avatar
      SCE to AUX

      “eventually it will reach a point where the loan period cannot be expanded anymore because the loan cannot be expanded beyond the average life of the vehicle.”

      I suspect that loan periods extend far beyond the time people actually keep a car. Effectively, this means people are leasing even when they buy.

  • avatar
    thornmark

    it is savers that are getting screwed

    poor, middle class or rich

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