Carmakers are currently very desperate for buyers, since people are more into saving money these days, what with the global pandemic and ensuing recession. Jeep, for example, is offering zero-percent interest on a car loan for seven years on some cars for some buyers, just like Chevy, GMC, Hyundai, Buick, Jaguar, Genesis, and Ram. Reconsider if you’re thinking of doing this!
If you’re like most people these days, you probably want a truck or SUV, and these days a lot of trucks and SUVs cost between $30,000 and $40,000, which is more than most sedans and hatchbacks. One way for $30,000 or $40,000 to feel less, though, is to stretch the repayment of that money over a longer period of time, making monthly payments smaller, and more “affordable.” More recognizable as a car payment, you might say, and not that of a small home.
This can seem appealing to buyers for obvious reasons, but there are also reasons automakers offer them at all: Because the profit margin on trucks and SUVs is so big and to simply keep product moving, especially when the economy is bad. Seven-year loans aren’t new, of course, but what’s unreal is how prevalent they’ve become and how swiftly because of the coronavirus outbreak.
Here’s a stat from Bloomberg:
In the last full week of March, 23% of new-vehicle buyers took out 84-month loans to finance their purchase, Joe Spak, an analyst at RBC Capital Markets, said in a report Friday that cited data from J.D. Power. Prior to the coronavirus crisis, loans that long were only 7 to 8% of the mix.
Twenty-three percent! Surely a lot of those people are taking advantage of the zero-percent interest, though as we’ve said in this space before, a zero-percent interest loan is only a good deal if you can afford the payment.
Bloomberg also touches on one of the other main problems with seven-year loans:
With longer-term loans, borrowers face greater risk of owing more than what their vehicle is actually worth. Consumers in this position — referred to as negative equity — are likely to take longer to re-enter the auto market.
It’s almost certain that you will owe more than your car is worth from the very beginning of the loan, since driving it off the lot erases a sizable chunk of value immediately. And a seven-year loan also can’t hide the fact that new cars are plainly more expensive today than they were in the last recession, while real wages haven’t risen as much.
We’ll see eventually how many of the people taking out these loans could actually afford them. Maybe we’ll even see it before 2027, if the economy really falls off a cliff.