Car buyers open up loan payments to record lengths to get in pricier vehicles
Published: July Four, two thousand seventeen 6:Ten a.m. ET
Average auto-loan lengths are at almost seventy months and payments are at the highest this year, says Edmunds
RachelKoning Beals
As car buyers’ obsession with thicker, pricier vehicles grows, so does their readiness to take longer to pay for them, says fresh analysis from Edmunds.com.
The average auto-loan length reached an all-time high of Sixty-nine.Three months in June. That’s 6.8% longer than five years ago, said the site that provides auto industry statistics and news.
The average amount that buyers financed was hit with the fattest uptick for the year last month, at $30,945, or up $631 from May. The financing trend also lead to the highest monthly payments for the year, now averaging $517, which enhanced from $510 in May.
“Stretching out loan terms to secure a monthly payment they’re convenient with is becoming buyers’ go-to way to get the cars they want, tooled the way they want them,” said Jessica Caldwell, Edmunds executive director of industry analysis.
Of course car depreciation can mean that borrowers find themselves in an upside-down loan pretty quickly.
“It’s financially risky, leaving borrowers exposed to being upside down on their vehicles for a large chunk of their loans, but it’s also a sign that consumers are still certain enough in the economy to spend more on their vehicles and commit to paying for them longer,” Caldwell added.
Financial terms, including still-low, tho’ rising, prevailing interest rates are adding to loan request. Edmunds found that the annual percentage rate dipped just below 5% in June for the very first time since February. Still, the APR has enlargened Five.7% from a year ago and 13.6% from five years ago.
Credit market observers proceed to keep a close eye on bubbling risks in the auto-loan market, especially for the riskiest, or subprime, borrowers whose debt fountains in general are back at levels near the 2008-09 financial crisis. They’re also watching the acute rise in non-bank lenders who are extending loans to lower-rated borrowers. But credit tracker Experian said in an early-June report that the lending market tightened early year as lenders became pickier and car-loan delinquencies fell.
The average credit score of borrowers of a new-vehicle loan rose from seven hundred twelve in the very first quarter of last year to seven hundred seventeen in the very first quarter of 2017, Experian said. For used-car loans, the scores rose from six hundred forty five to six hundred fifty two in the same time framework.
“There’s always someone who claims that the (subprime auto loan) bubble is bursting,” Experian said then. “The truth is, lenders are making rational decisions based on shifts in the market. When delinquencies commenced to go up, the lending industry shifted to more creditworthy customers.”
Higher prices overall appeared to turn off some would-be buyers from taking the plunge with a fresh car last month. Auto sales continued to slide in June, industry data issued Monday displayed. Car buyers reacted to higher vehicle prices, while Detroit backed away from dumping unwanted inventory into rental-car lots, which helped keep prices up.
Car buyers open up loan payments to record lengths to get in pricier vehicles
Car buyers spread loan payments to record lengths to get in pricier vehicles
Published: July 8, two thousand seventeen 12:50 p.m. ET
Five reasons not to finance your car with a loan longer than sixty months
PhilipReed
This article is reprinted by permission from NerdWallet.
You have your heart set on that hot fresh sport coupe with alloy wheels and a sunroof but the monthly payments just won’t fit in your budget. The salesman breathes sympathetically, and then says, “I have an idea of how to make this work.”
He recommends a 72- or 84-month loan. The down payment remains the same but the payment’s a bit lower. As he talks, you begin to picture the coupe in your garage and displaying it off to your friends.
But wait just a 2nd! Cancel the daydreams. Long loan terms are setting you up for a “vicious cycle of negative equity,” says car buying concierge Oren Weintraub, president of AuthorityAuto.com.
Alarming car buying statistics
Auto loans over sixty months are not the best way to finance a car. And yet, 43.5% of new-car buyers in the third quarter of two thousand fifteen took out loans of sixty one to seventy two months, according to Experian. EXPN, -0.77% More alarmingly, Experian data demonstrate 27.5% of car shoppers are signing loans for inbetween seventy three and eighty four months — that’s from six to seven years, folks, and that category grew 17.1% from the previous year.
“To close the deal, [car dealers] need to suggest a payment that is convenient,” Weintraub says. “Instead of reducing the sale price of the car, they extend the loan.” However, he adds that most dealers very likely don’t expose how that can switch the interest rate and create other long-term financial problems for the buyer.
Used-car financing is following a similar pattern, with potentially worse results. Experian exposes that 41.3% of used-car shoppers are taking 61- to 72-month loans while 16.2% go even longer, financing inbetween seventy three and eighty four months. Again, that category is growing prompt — up 12% over the previous year.
If you bought a 3-year-old car, and took out an 84-month loan, it would be ten years old when the loan was eventually paid off. Attempt to imagine how you’d feel making loan payments on a battered 10-year-old heap.
Long loan terms are yet another contraption the dealer has to put you into a car because they concentrate you on the monthly payment, not the overall cost. But, just because you could qualify for these long loans, doesn’t mean you should take them.
Five reasons to buck the long-loan trend:
You are “underwater” instantaneously. Underwater means you owe more to the bank than the car is worth. “Ideally, consumers should go for the shortest length auto loan that they can afford,” says Jesse Toprak, CEO of CarHub.com. “The shorter the loan length, the quicker the equity buildup in your car.” Equity in your car means you aren’t drowning in debt and could trade it in or sell it at any time and pocket some cash.
It sets you up for a negative equity cycle. Say you have to trade in the car before a 72-month loan is paid off. Even after providing you credit for the value of the trade-in, you could still owe, for example, $Four,000. “A dealer will find a way to bury that four grand in the next loan,” Weintraub says. “And then that money could even be spinned into the next loan after that.” Each time, the loan gets larger and your debt increases.
Interest rates leap over sixty months. Consumers pay higher interest rates when they open up loan lengths over sixty months, according to Edmunds analyst Jeremy Acevedo. Not only that, but Edmunds data from this April demonstrate that when consumers agree to a longer loan they evidently determine to borrow more money, indicating that they are buying a more expensive car, including extras like warranties or other products, or simply paying more for the same car. When financing with term lengths from sixty one to sixty six months, the average amount financed was $27,615 and the interest rate was Two.8%, bringing the monthly payment to $462. But when a car buyer agrees to open up the loan to sixty seven to seventy two months, the average amount financed was $30,001 and the interest rate more than doubled to 6.4%. This gave the buyer a monthly payment of $500.
You’ll be shelling out for repairs and loan payments. A 6- or 7-year-old car will likely have over 75,000 miles on it. A car this old will undoubtedly need tires, brakes and other expensive maintenance — let alone unexpected repairs. Can you meet the $500 average loan payment cited by Edmunds, and pay for the car’s upkeep? If you bought an extended warranty, that would shove the monthly payment higher.
Look at all the extra interest you’ll pay. Interest is money down the drain. It isn’t even tax deductible. So take a long hard look at what extending the loan costs you. Plugging Edmunds’ averages into an auto loan calculator, a person financing the $27,615 car at Two.8% for sixty months will pay a total of $Two,010 in interest. The person who moves up to a $30,001 car and finances for seventy two months at the average of 6.4% pays triple the interest, a whopping $6,207.
So what’s a car buyer to do? There are ways to get the car you want and finance it responsibly.
Four strategies to turn the tables on long loans:
Lease instead of buy. If you truly want that sport coupe, and can’t afford to buy it, you can very likely lease for less money upfront and lower monthly payments. This is an option Weintraub will suggest to his clients, especially since leasing deals are so aggressive right now, he says. If you want the car at the end of the lease, you have the right to buy it at the current market value.
Use low APRs to increase cash flow for investing. CarHub’s Toprak says the only time to take a long loan is when you can get it at a very low APR. For example, Toyota TM, +0.04% offers 72-month loans on some models at 0.9%. So instead of tying up your money by making a large down payment on a 60-month loan, and making high monthly payments, use the money you free up for investments, which could yield a higher come back.
Refinance your bad loan. If your emotions take over, and you sign a 72-month loan for that sport coupe, all’s not lost. Assuming your credit is good, you can refinance the loan at better terms without an early payment penalty or fees.
Make a large down payment to prepay the depreciation. If you do determine to take out a long loan, you can avoid being underwater by making a large down payment. If you do that, you can trade out of the car without having to roll negative equity into the next loan.
Making the right auto loan decision will help you and your family love a stress-free life and prepare for the future. To review the basics of car financing, take a look at How Much Should My Car Down Payment Be?
Car buyers open up loan payments to record lengths to get in pricier vehicles
Car buyers open up loan payments to record lengths to get in pricier vehicles
Published: July 8, two thousand seventeen 12:50 p.m. ET
Five reasons not to finance your car with a loan longer than sixty months
PhilipReed
This article is reprinted by permission from NerdWallet.
You have your heart set on that hot fresh sport coupe with alloy wheels and a sunroof but the monthly payments just won’t fit in your budget. The salesman breathes sympathetically, and then says, “I have an idea of how to make this work.”
He recommends a 72- or 84-month loan. The down payment remains the same but the payment’s a bit lower. As he talks, you begin to picture the coupe in your garage and showcasing it off to your friends.
But wait just a 2nd! Cancel the daydreams. Long loan terms are setting you up for a “vicious cycle of negative equity,” says car buying concierge Oren Weintraub, president of AuthorityAuto.com.
Alarming car buying statistics
Auto loans over sixty months are not the best way to finance a car. And yet, 43.5% of new-car buyers in the third quarter of two thousand fifteen took out loans of sixty one to seventy two months, according to Experian. EXPN, -0.77% More alarmingly, Experian data showcase 27.5% of car shoppers are signing loans for inbetween seventy three and eighty four months — that’s from six to seven years, folks, and that category grew 17.1% from the previous year.
“To close the deal, [car dealers] need to suggest a payment that is convenient,” Weintraub says. “Instead of reducing the sale price of the car, they extend the loan.” However, he adds that most dealers very likely don’t expose how that can switch the interest rate and create other long-term financial problems for the buyer.
Used-car financing is following a similar pattern, with potentially worse results. Experian exposes that 41.3% of used-car shoppers are taking 61- to 72-month loans while 16.2% go even longer, financing inbetween seventy three and eighty four months. Again, that category is growing swift — up 12% over the previous year.
If you bought a 3-year-old car, and took out an 84-month loan, it would be ten years old when the loan was ultimately paid off. Attempt to imagine how you’d feel making loan payments on a battered 10-year-old heap.
Long loan terms are yet another instrument the dealer has to put you into a car because they concentrate you on the monthly payment, not the overall cost. But, just because you could qualify for these long loans, doesn’t mean you should take them.
Five reasons to buck the long-loan trend:
You are “underwater” instantly. Underwater means you owe more to the bank than the car is worth. “Ideally, consumers should go for the shortest length auto loan that they can afford,” says Jesse Toprak, CEO of CarHub.com. “The shorter the loan length, the quicker the equity buildup in your car.” Equity in your car means you aren’t drowning in debt and could trade it in or sell it at any time and pocket some cash.
It sets you up for a negative equity cycle. Say you have to trade in the car before a 72-month loan is paid off. Even after providing you credit for the value of the trade-in, you could still owe, for example, $Four,000. “A dealer will find a way to bury that four grand in the next loan,” Weintraub says. “And then that money could even be flipped into the next loan after that.” Each time, the loan gets larger and your debt increases.
Interest rates leap over sixty months. Consumers pay higher interest rates when they spread loan lengths over sixty months, according to Edmunds analyst Jeremy Acevedo. Not only that, but Edmunds data from this April showcase that when consumers agree to a longer loan they evidently determine to borrow more money, indicating that they are buying a more expensive car, including extras like warranties or other products, or simply paying more for the same car. When financing with term lengths from sixty one to sixty six months, the average amount financed was $27,615 and the interest rate was Two.8%, bringing the monthly payment to $462. But when a car buyer agrees to spread the loan to sixty seven to seventy two months, the average amount financed was $30,001 and the interest rate more than doubled to 6.4%. This gave the buyer a monthly payment of $500.
You’ll be shelling out for repairs and loan payments. A 6- or 7-year-old car will likely have over 75,000 miles on it. A car this old will undoubtedly need tires, brakes and other expensive maintenance — let alone unexpected repairs. Can you meet the $500 average loan payment cited by Edmunds, and pay for the car’s upkeep? If you bought an extended warranty, that would thrust the monthly payment higher.
Look at all the extra interest you’ll pay. Interest is money down the drain. It isn’t even tax deductible. So take a long hard look at what extending the loan costs you. Plugging Edmunds’ averages into an auto loan calculator, a person financing the $27,615 car at Two.8% for sixty months will pay a total of $Two,010 in interest. The person who moves up to a $30,001 car and finances for seventy two months at the average of 6.4% pays triple the interest, a whopping $6,207.
So what’s a car buyer to do? There are ways to get the car you want and finance it responsibly.
Four strategies to turn the tables on long loans:
Lease instead of buy. If you truly want that sport coupe, and can’t afford to buy it, you can very likely lease for less money upfront and lower monthly payments. This is an option Weintraub will suggest to his clients, especially since leasing deals are so aggressive right now, he says. If you want the car at the end of the lease, you have the right to buy it at the current market value.
Use low APRs to increase cash flow for investing. CarHub’s Toprak says the only time to take a long loan is when you can get it at a very low APR. For example, Toyota TM, +0.04% offers 72-month loans on some models at 0.9%. So instead of tying up your money by making a large down payment on a 60-month loan, and making high monthly payments, use the money you free up for investments, which could yield a higher comeback.
Refinance your bad loan. If your emotions take over, and you sign a 72-month loan for that sport coupe, all’s not lost. Assuming your credit is good, you can refinance the loan at better terms without an early payment penalty or fees.
Make a large down payment to prepay the depreciation. If you do determine to take out a long loan, you can avoid being underwater by making a large down payment. If you do that, you can trade out of the car without having to roll negative equity into the next loan.
Making the right auto loan decision will help you and your family love a stress-free life and prepare for the future. To review the basics of car financing, take a look at How Much Should My Car Down Payment Be?