Some good news and bad news on the car-buying front. The good news is that the American economy has improved to the point where credit is much more readily available than it was a few years ago, so people have an easier time financing cars. The bad news is that the terms of their auto loans are increasing dramatically.
If you've ever financed a car, you know what a pain it is to make payments on the loan every month for four or five years. But what about seven years, or eight? That's what many buyers are opting for lately, according to the Wall Street Journal:
The average price of a new car is now $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465—the result of longer loan terms and lower interest rates.
In the final quarter of 2012, the average term of a new car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17% of all new car loans in the past quarter were between 73 and 84 months and there were even a few as long as 97 months. Four years ago, only 11% of loans fell into this category.
Emphasis mine. You read that right, 97 months — that's eight years and change.
The story says that most people who qualify for these longer loans have good credit scores and are typically buying more expensive cars.
These extra-long car loan terms seem good for new car buyers because they help keep the payments down, ideally under $500 a month. But as the story notes, it takes buyers much longer to reach the point where they owe less on the car than it is worth.
In the meantime, you're spending all that money each month for years at a time on a depreciating asset when it could be better spent on other things, like a mortgage or building up a savings account. You also may end up paying a ridiculous amount in interest over those years. The WSJ piece even calls loans that are longer than 72 months "subprime loans," which isn't encouraging at all considering how those loans in the housing market hammered our economy.
As the story notes, this is kind of a mixed bag for automakers. It's attractive for new buyers, but a lengthy loan can keep people from replacing their cars at some point. (This is also made possible by the fact that cars last much longer these days than they used to.)
Ideally, the best way to buy a car is to pay cash in full so you own it outright, even if this means buying something older. But this isn't feasible for many buyers — I'd even go so far as to say most buyers — so financing is necessary sometimes. Also, if you do it properly and with a low interest rate, financing can be beneficial to your credit rating.
The WSJ story closes on a very interesting note about how far car financing has come since the 1950s:
The length of loans has come a long way since Lee Iacocca, then a Ford regional manager, helped pioneer auto loans in the 1950s. He became a management star by developing a '56 for $56 sales pitch. The idea: consumers could buy a 1956 Ford for 20% down and $56 a month. The loans were paid off in just 36 months.
What do you think about these super-long car loans? Good or bad for buyers and the economy?
Photo credit Shutterstock
Hat tip to JM in DC!