Longer loans allow consumers to stretch their budgets

Ford Mustangs sits on the lot of a new-car dealership.

Tess Vigeland: It's been a year since protesters gathered in a small park in New York, Zuccotti Park, to air a whole raft of grievances. They railed against the banks, against big corporations, against the government. One of the biggest problems Occupy Wall Street had with lenders was that they foisted unsuitable loans on people who couldn't afford to borrow them. That may be happening again.

As Marketplace's Jeff Tyler tells us, many Americans are jumping at the chance to take out car loans for as long as seven years, even though it's gonna cost them in the end.


Jeff Tyler: Americans are in love with their cars -- and none more than song-writers. They serenade the Mercury, the Chevy and the pink Cadillac. Dig a little deeper, and you'll find a sub-genre -- songs about the cars guys love but can't afford. One of my favorites is Ry Cooder's cover of this song.

Ry Cooder covering "Crazy 'About an Automobile" by Billy Emerson: Every woman I know is crazy 'bout an automobile. Every woman I know is crazy 'bout an automobile. And here I am standing with nothing but rubber heels.

Thirty-three-year-old Dallas Highfill told me he's crazy about an automobile that he has hasn't been able to afford, until now. After being unemployed for a couple years, he's working again.

Dallas Highfill: I work at a gas station. It pays nine bucks an hour.

He works the overnight shift, where he watches cars he can't afford, come and go. Highfill told me that he knows exactly the car he wants to buy.

Ladis Sanchez: This here is a 2013 V6 Mustang.

Ladis Sanchez is a salesman with Galpin Ford in Van Nuys, Calif.

Sound of engine revving

Sanchez: They don't call them muscle cars for no reason.

Sanchez says the engine delivers 305 horsepower and still gets around 31 miles to the gallon. Now for the bottom line. How much?

Sanchez: These particular cars start right around 24 to 25.

$25,000 is a price tag that would generally be out of reach for a guy who takes home around $1,500 a month. But Highfill has a plan and a budget.

Highfill: $400 a month is something I can actually afford and still pay my other bills, including car insurance.

The only way he can afford the Mustang on his budget is if he takes out a six- or seven-year loan.

Highfill: If I want to get the Mustang, I can't afford the payments on a lower term.

Lower-term, or shorter, loans come with higher monthly payments. When the loan is spread across more time, the monthly payments are smaller.

Melinda Zabritski: We are beginning to see that the average term length is getting longer.

Melinda Zabritski is director of automotive credit with Experian, where she tracks auto loans. The average American car loan is now 64 months -– that's five years. And climbing.

Zabritski: Seventy-two months has become the new 60. We're certainly seeing that that 72-month term has quickly become the most common term out there.

Seventy-two months is six years. Dallas Highfill will need a loan like that in order to afford his dream car. The typical five-year loan at 5 percent interest would cost him around $473 a month. Extend that loan to six years, and the monthly payment drops to $404 a month. But adding that one extra year would cost Highfill an additional $700 in interest.

Jessica Caldwell is a senior analyst at Edmunds.com. She told me, lots of consumers are willing to make that trade off.

Jessica Caldwell: There are people that would like something nicer, that want to step up. And they see that having a longer loan-term is a way to get there.

But those longer-term loans have another pitfall. Experian's Melinda Zabritski says the extra interest charges for a six or seven-year loan can trap consumers who don't want to hold on to a car forever.

Zabritski: If you're going to trade that vehicle in in a few years, there's definitely the downside in that you've not perhaps made enough payments to be right-side-up in that loan. And then you'll have to deal with a negative-equity situation when it comes time to trade that vehicle in.

Now, you might think it's crazy for someone who doesn't make much money to buy an expensive new muscle car. But Dallas Highfill assured me that he's run the numbers and he can make it work. The lure of the Mustang is just too tempting.

Highfill: I've always been a fan of the Mustang. And I've wanted one for many, many years.

The Ford salesman would like to help Dallas Highfill hook-up with the object of his desire. I passed the salesman's phone number to Dallas. It's too soon to say if anything will come of their relationship.

For Marketplace, I'm Jeff Tyler in Los Angeles -– the car capital of the world -– where everybody who's anybody knows this:

Ry Cooder (from the album Borderline): Man, when I get me some money, I just got to get me some kind of automobile. Just seems like the women in this town don't pay no attention to you, unless you're driving. Nothing but rubber heels...

About the author

Jeff Tyler is a reporter for Marketplace’s Los Angeles bureau, where he reports on issues related to immigration and Latin America.

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