| Car loans keep getting longer |
| By Dana Dratch • Bankrate.com |
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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.
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| It's the payments, stupid |
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Source: Bankrate.com |
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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.
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