Get Ready For The 10 Year Car Loan

Posted under ECONOMIC on January 26th, 2016 by Thomas Dishaw

It’s coming, the unthinkable 10 year car loan is right around the corner. Who says the middle class is dead? Dealerships are reporting buyers want more car and don’t care about long-term agreements.  With current terms as long as EIGHT YEARS, banks should have no problem getting a TEN YEAR commitment from these debt zombies.

At Shaun Del Grande’s car dealerships in the San Francisco Bay Area, the salespeople sometimes find themselves trying to convince shoppers to buy less car, spend more cash, and use more traditional financing.
That might seem like an unusual sales tactic to those familiar with car-dealer stereotypes. But it reflects a change in the way many buy cars: Longer loans — for six, seven, or even eight years, rather than the traditional five — are more common, tempting buyers to take on more debt to buy more expensive vehicles.
Over the last 10 years, the length of the average car loan has risen above 68 months, driven by cheaper financing, lower interest rates, and postrecession demand. Six-year loans are “very common right now,” said Edmunds.com analyst Jessica Caldwell.
Experts say the longer loans have boosted car sales; some economists wonder whether they point toward more delinquencies. Personal finance and car-buying experts, meanwhile, generally caution against the loans, which lower payments but mean more interest and finance charges. “We always tell [customers] that this is marathon, not a sprint,” Del Grande said.
For now, however, they remain a popular option. Jason Freese, a lending consultant with Alliant Credit Union in Chicago, has helped “payment-sensitive” buyers into electric cars from Tesla Motors TSLA, -0.52% — its basic Model S sedan starts around $70,000 — using loans as long as seven years.
“It realizes their dream, and it fits their budget,” Freese said.
The average length of car loans has risen steadily in recent years. While five-year — or 60-month — loans were traditionally the longest most lenders offered, they began to lengthen around 2012 as a means of enticing buyers as interest rates stayed low and credit became more widely available after the financial crisis.
Cars, meanwhile, have grown more expensive as they incorporated advanced technology, such as driver-assistance systems and high-end entertainment and connectivity options.
Ten years ago, the average loan length for new vehicles was 63.3 months; in November, it was 68.3, according to Edmunds.com.
Credit-tracking firm Experian says loans with terms lasting 73 to 84 months accounted for nearly 28% of all new vehicles financed in the third quarter of last year, up 17% from the same quarter a year ago. That share hit 30% earlier in 2015, the highest percentage since Experian began reporting the data in 2006.
Longer loans have helped buyers go up a level in size or luxury, according to Caldwell, but they have also been a “big driver” of auto sales generally. Last year was among the best ever for the industry, with some analysts estimating that more than 18 million vehicles sold.
Sales were under 12 million five years ago in the wake of the financial crisis, according to citation; they were under 17 million in 2005. The previous banner year was 2000, when more than 17 million cars were sold, according to Edmunds.com.

Lower gas prices and easy credit were among the reasons for last year’s numbers, according to analysts at Stifel, as were low interest rates; By making savings unattractive, said Jack Nerad, executive market analyst at Kelley Blue Book, low rates lead some to decide that “I might as well buy a car.”
That meant a surge in car loans and an accompanying boom in “subprime” car debt, according to the New York Federal Reserve, which defined subprime originations as loans to borrowers with credit scores below 620 — about 20% of all lenders — in a November white paper.
Third-quarter 2015 car oan originations reached $157 billion, the highest in a decade, according to the New York Fed. Total car loan balances stood at $1.05 trillion as of late September, up from around $900 billion in mid-2014.
Subprime car loan originations jumped to nearly $40 billion in the second quarter, dipping only slightly in the third quarter, according to the New York Fed.
“The total number of subprime originations has since reached a 10-year, precrisis high, only surpassed by the unique periods in 2005 that were associated with ‘employee pricing’ promotions and record sales for the auto manufacturers,” the New York Fed wrote.
The increase in subprime car loans may stoke fears of eroding credit standards, which could lead to more delinquencies or repossessions. But the New York Fed cautioned that its data wasn’t adjusted for inflation — and the prices of new cars have increased by about 6% in the past 10 years, so “although the level of subprime loans is comparable to that from a decade ago, it is likely lower in real terms.”
The share of buyers delinquent for more than 90 days on their car loan has remained steady around 3%, meanwhile, an improvement from the 5% rate that prevailed five years ago.
Low interest rates have helped drive car sales by making car loans seem more attractive.

Pent-up demand for new cars

As vehicle prices have risen, average car loans and monthly payment amounts have also increased. The average new-car amount financed was expected to reach $29,121 in 2015, up $3,121 from 2010, according to Caldwell; the average monthly payment was projected to hit $492, up $21 over the same period.
It’s common for buyers to overextend when buying new cars, according to Nerad. Getting one can be fun, he said, and many postponed purchases after the financial crises, leading to pent-up demand.
Edmunds.com and many financial advisers recommend loans no longer than five years, or 60 months — shorter if the buyer can afford it. Longer loans mean more interest and finance charges, and cars tend to depreciate rapidly after the five-year mark.
Take the average price of a new car in 2015, $33,443, and an average interest rate of 4.6%. Assuming a typical $5,000 down payment, the buyer would’ve paid $3,412 in interest at the end of a five-year loan. An eight-year loan lowers the payment from $531 to $354, but the interest paid increases to $5,543.
Buyers who use longer loans to keep payments low, experts say, are essentially paying more to make larger or fancier cars seem affordable. While many Tesla buyers make more than $200,00 a year, Freese said, some making half that — or even less — have used them to get into the cars.
“If you extend a car loan for another year [the payments] fit in their budget,” Nerad said, even as they get “deeper and deeper into the hole.”