When you go to buy a new car, how long do you really expect to make payments on it? Three years? Four? Maybe five? Lately, there’s a good chance it’s more than six years, which is an increasingly troubling sign for buyers, the auto industry and the economy as a whole.
The Wall Street Journal has a new story out that’s a kind of overview of something we’ve covered extensively around these parts—that super-long car loans, often with very high interest rates, are the new normal in car buying. And buyers are having a hell of a time keeping up. It means that car loans stick around well into when some of these models need pricey repairs, or past their original owners, and they eat into more and more of our incomes.
Again, this trend is probably nothing new if you’re steeped in automotive news, or go out of your way to be a savvy buyer. But these trends keep ensnaring new car shoppers, and there’s seemingly no end in sight.
Here’s a few highlights from this story:
About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%.
But the size of the average auto loan has grown by about a third over the past decade to $32,119 for a new car, according to Experian. To keep payments manageable, the car industry has taken to adding more months to the end of the loan.
The average loan stretches for roughly 69 months, a record. Some last much longer. In the first half of the year, 1.5% of auto loans for new vehicles had terms of 85 months or longer, according to Experian. Five years ago, these eight- and nine-year loans were practically nonexistent.
A third of new-car buyers who trade in their cars roll debt from old vehicles into their new loans, according to car-shopping site Edmunds. That is up from about a quarter before the financial crisis.
Even a conservative car loan often won’t do it. The median-income U.S. household with a four-year loan, 20% down and a payment under 10% of gross income—a standard budget—could afford a car worth $18,390, excluding taxes, according to an analysis by personal-finance website Bankrate.com.
All of which is pretty concerning, and out of step with how car financing worked for many decades—people either paid cash outright or had their vehicles paid off in full within a few years. Now, instead of becoming an asset, it’s just a never-ending money pit, and one that often gets rolled over into the next car when that becomes necessary. It’s a wealth-killer, a savings-killer.
So how did this happen? As that story notes, it’s a kind of consequence of the Great Recession and its aftermath. As the economy recovered following the late 2000s, people had pent-up demand for new cars, and interest rates happened to hover around zero, so car shoppers went on a buying blitz that lasted years. A few other factors are crucial too: the rise of bigger, more expensive crossovers and pickup trucks as gas stayed cheap, new and highly in-demand safety tech that pushed car prices up, and the fact that household incomes have risen just incrementally since the 1970s when adjusted for inflation.
All of that was a perfect storm that “served as a bailout for the entire auto industry,” as the WSJ astutely puts it. Dealers, their finance departments and the sales-hungry industry as a whole were happy to oblige. (Hell, how many automakers are getting rid of small and affordable cars entirely?)
But it meant buyers were suddenly spending $35,000 or more on normal family cars, shoving hefty payments into their monthly budgets and getting stuck in loans that lasted into perpetuity. Delinquincies and repossessions are on the rise as well.
And it’s a scary situation if, in fact, we face some kind of economic downturn in the next year or so, whether it be a full-blown recession or just the kind of natural contraction that happens after a decade of unfettered growth. Lost income and lost jobs makes it a lot harder for people to make the $500 a month payment they’re locked into for six years on a Honda Accord, like one guy in that story is.
So what can you, as a new car shopper, do to avoid these mistakes? Figuring out your exact budget is crucial, as is committing to not go over that. There are tons of calculators and other online tools that can help you determine exactly what you can afford. Don’t buy more features or size than you actually need.
If you’re looking to own long-term, maybe look at slightly used or even CPO cars with proven reliability—let someone else take the initial depreciation hit and you keep a dependable machine long-term. Shop around for different sources of financing, too. Look at credit unions in addition to what the dealer is offering. Don’t get tricked into too many add-ons, either. (One poor guy in this story got an extended warranty on a new Toyota RAV4. Look, you probably don’t need an extended warranty on that, it’s not an Alfa Romeo Giulia or something. A RAV4 is going to hold together just fine. It’s the entire point of buying a RAV4. Driving excitement sure as hell isn’t.)
Finally, I’d advise keeping in mind what having a car payment for 72 months really means. You might be able to fit that payment into your budget now, but what if something changes for you drastically down the line? How will you afford it if you face a job loss or an illness or a cross-country move? You want to get that car paid off as quickly as possible instead of making payments for the rest of your life.
There are some extremely predatory aspects to new car buying—to say nothing of the loans that are legitimately, purposefully predatory, and almost always aimed at people with bad credit or lower incomes—but shopping smart is your best defense.
As for the car industry itself, well, it may face a reckoning of its own soon.