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Car loans keep getting longer

Think that car payment would be a little more affordable if you could just spread those payments over another year or two?

If you do, you're not alone. Eighty-nine percent of new car buyers are financing their vehicles for more than four years and 55 percent select loans that extend more than five years, according to a 2006 study commissioned by the Consumer Bankers Association and conducted by BenchMark Consulting International.

"Cars are made better, they are more expensive and people are keeping them longer," says Carter Myers, president of Carter Myers Automotive, a group of Virginia-based dealerships, past chairman of the National Automobile Dealers Association and chairman of Automotive Retailing Today, an industry association of manufacturers and dealers.

Given those circumstances, "it's natural" that the loan cycle would lengthen, he says.

With used cars, 82 percent of buyers finance for more than four years and 40 percent opt for payments to run more than five years, according to the study.

It's the payments, stupid  
Source: Bankrate.com

A good idea?
So are longer loans good for the consumer?

"It has allowed consumers to buy more car than they had in the past," says Marguerite Watanabe, auto finance practice manager for BenchMark, a management consulting firm.

Twenty years ago, when consumers shopped for a car, they focused on the cost of the car, she says. Today, they shop payments. "The monthly payment is now what's driving the purchase," she says.

Whether it's a good move for an individual consumer may depend on how he or she handles the loan, says Philip Reed, consumer service advice editor for Edmunds.com.

Longer payoffs don't offer the buyer a lot of positives, Reed says. Virtually the only upside is that "You can afford a car you couldn't otherwise afford," he says.

A long-term loan delays ownership, even as the car is decreasing in value, Reed says. Typically, cars drop in value about 20 percent when the first owner drives them off the lot. Between years two and five, they plateau, losing value gradually. After year five, value "begins dropping off more steeply" for most cars, he says.

There are ways for consumers to benefit from longer-loan terms, Reed says.

He recently took out a five-year loan on a new car with the goal of paying extra every month and getting the note paid in three years. The longer term gives him the flexibility of a lower minimum payment and he gets to decide just how much more money he puts toward the payment every month.

"If you're fairly disciplined, you can make larger payments and pay it off early," Reed says.

-- Posted: Nov. 1, 2006
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