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Longer loans boost car sales
Cheap credit is boosting car sales. But more buyers are taking loans of up to seven years. Monthly payments are lower; the total cost is higher.
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Sarah Gardner: Few of us can afford a special-edition car, but your everyday edition? Well, that's been one of the few bright spots in this economy. Auto sales are up, in part, thanks to cheap credit and strong dealer incentives. Recent numbers show more consumers are taking out longer car loans. Meaning, they pay back the loan over a longer period of time -- some up to seven years.
But as Marketplace's Jeff Tyler explains in this installment of our personal finance series, Money Matters, those long-term loans come at a cost.
Jeff Tyler: Southern California gas station attendant Dallas Highfill earns $9 an hour. He’s on the verge of taking out a seven-year loan for a new car.
Dallas Highfill: I’ve always been a fan of the Mustang. And I finally decided that my current car is no longer suitable. So I want to get a Mustang.
In particular, Highfill wants a 2013 Mustang V-6. Salesman Ladis Sanchez at Galpin Ford showed me their latest muscle car.
Ladis Sanchez: The 2013 Mustang was redesigned for this year. As you can see, it has a new front end, a new rear end on the vehicle.
And how much does this baby go for?
Sanchez: These particular cars start right around $24,000 or $25,000, and with options, can go up from there.
A $25,000 car is within reach for many consumers, thanks to some strong dealer incentives. Like five-year loans with no interest. But people with low credit scores like Highfill often don’t qualify.
Jessica Caldwell: Some people will not qualify for zero-percent, at all. But, you know, it definitely is a hook that automakers and dealers use to get people into the dealership.
Jessica Caldwell is a senior analyst at Edmunds.com. She’s been tracking a trend. Car buyers are taking loans that can be paid off over a longer period of time. The average loan for a new car has grown to 65 months -- more than five years.
Some loans go as long as seven years. Those enable people to make a lower loan payment each month. But the trade off is that the interest payments cost them more in the long run.
Caldwell: I think you’re going to hit the point in five or six years, thinking, ‘Gosh, why did I sign up for this loan?’ But in the short term, you know, you’re getting a nicer car. Probably something you couldn’t afford it you opted for a three to five year loan. And, for a lot of people, it just makes sense.
Dallas Highfill knows the seven-year loan will cost more. But he thinks it’s worth it to get his dream car.
Highfill: It’s that or get a 1993 -- ha ha -- Corolla, or something. Because I’m not going to be able to afford anything in cash for years.
According to his budget, a seven-year loan will leave him enough money each month to pay for auto insurance.
In Los Angeles, I’m Jeff Tyler for Marketplace.
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Yes I am considering those costs. Thus why I'm getting a newer car that will still be under warranty and that I know it's history. I'd rather not pick up a 10 year old car then have to replace the transmission 3 months later for $3000. My previous car has lasted me 8 years with only tired, brakes and various other costs that were well within reach as they were needed. Knowing the history of a car can save you a ton of money from having unexpected issues pop up when you can least afford it.
Mr Highfill's problem isn't the 7 year loan. The problem is that he's buying a car that nobody can afford on a $9/hr job. If he just can't live without a Mustang, perhaps a used car would satisfy just as well...and cost half as much.
If you keep your cars for 10 years (as I do), there is nothing wrong with a 7 year loan. Criminal? Hardly. It's called producing the products that people want.
As I said in another post, I'm not stuck doing the same dead-end job. I AM capable of moving up in the world and paying the loan off faster. Also selling my current car will go a decent way towards paying this one off. It might be a 14 year old car (been in my possession for over 8 years) but it still has a decent enough value on the open market.
If a 7 year car loan isn't criminal, it ought to be. I suppose the bank making such a loan immediately sells the paper to someone else, because of course they don't want to be on the hook when this guy defaults. It's the housing subprime debacle all over again, and guess who is going to end up paying for this car. US, the taxpayers.
Any lender making a 7 year loan for a car is performing a criminal act. As a rule of thumb, if you can't pay for a car in 3 years, you can't afford it. Mr. Highfil will be seriously upside down once the car leaves the showroom floor.
Mr. Highfil is clearly too immature to comprehend paying a loan every month for 7 years. It seems he is chasing the latest "shiny metal thing." Most likely the car will get wrecked, or Mr. Highfil will default in 2 + years. Either way someone else will end up paying for this car. Just what America needs is another case of immediate gratification.
Shortly after the interview I did in fact decide to go with a year older car which gets me significantly better insurance rate, lower cost (and more negotiation flexibility), and no loss of value from driving it off the show room floor. I'll just leave the insulting tone of the rest of your post alone since it has no value.
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