Long-term Car Loans Can Trap Buyers
By JACK MAZURAK
The (Jackson, Miss.) Clarion-Ledger
After 2007 ended with about 16.1 million new-vehicle sales in the U.S., the lowest in nine years, the auto industry is grappling to push sales higher for 2008 and sees long-term loans as one solution.
Toyota cut back on incentive offers in late 2007 and began offering 84-month loans. Other automakers, including the Detroit 3, also offer long-term loans — all reserved for customers with sparkling credit.
Long-term loans, which carry lower monthly payments, make vehicles appear to be more affordable. But over time, such loans can trap consumers into paying significantly more than sticker price.
For instance, a person financing $25,000 at 7 percent interest would pay $377 a month on an 84-month loan, compared with $599 for a 48-month-loan. However, the person with the longer-term loan ends up paying about $3,000 more because of the additional interest.
Buyers who want a new car after three or four years can end up owing more than the car is worth, a situation known as being upside down.
In a summary of trends for 2008, analysts at automotive Web site Edmunds.com predicted consumers increasingly will find themselves upside down on their car loans.
Of those who bought new cars in 2007 and traded in a used vehicle, 25.6 percent had negative equity in their trade-in, Edmunds.com found. The average amount upside down was $4,059, the highest negative equity average on record.
Buyers often fold the negative equity into a new-car loan, and can end up owing Lexus-level money on a Toyota, or Lincoln dollars on a Ford.
"Most people spend their entire life with a car note," financial adviser Chris McAlpin said. "That's not how to get ahead.
"I'd say 36 months max. Put money down, buy a car you can afford. Don't get all the bells and whistles; get something that's a good value, something that's going to run a while."
He suggested that people let go of cars as status symbols and drive something practical and affordable.
Defaults rise
Terry Jackson, automotive writer for Bankrate.com, said long-term loans are double-edged swords for automakers.
"As car prices rise and buyers want vehicles with luxury appointments, the only way to make the deal attractive is to offer lower monthly payments," Jackson wrote in a Dec. 21 column. "This is especially true in today's marketplace, where new vehicles sales are spiraling downward. Lenders also know that the default rate on these longer loans is higher than on loans of 60 months or less."
Consumers, including those with great credit, can see their situations drastically change in seven years.
"Buyers can lose their jobs, get sick, get divorced or experience another life event that prevents them from making the loan payment," Jackson said. "My advice? If you have to extend your car loan beyond five years and can't afford to put at least 20 percent down, scale back your car desires to something you can afford."
Loans aren't popular
Dealers said they haven't seen much demand for 72- and 84-month loans. Rather, customers pay cash, lease or take incentive options.
Larry Cruise, president of Fowler Buick Pontiac GMC in Brandon, Miss., said 10 percent of customers lease, 60 percent to 70 percent cut a check and the rest finance.
"But we're really not seeing (long-term financing)," Cruise said. "When you can get zero percent at 60 months, it makes sense to go with that because you're getting free money."
Shanehan Westphal, sales manager at Herrin-Gear Infiniti in Jackson, Miss., said 40 percent of his customers lease, a good alternative to long-term loans when the buyer isn't going to keep the car more than five years.
"If you're going to … finance it for five or six years and keep it for three, you're going to be in debt," Westphal said. "If you lease for three years, you come back in three and toss us back the keys — who's the smarter person?"
