“If someone’s going to buy a new car and drive it until the wheels fall off, it’s fine as long as they get a low interest rate,” Caldwell said. “However, that’s not what people do. They buy these cars and they want to get a new car in five years before the loan gets paid off and they can get into a situation where they have negative equity on their loan, which puts them in a worse situation for their next purchase. They owe more than its worth and they’re rolling that negative equity into their next loan.”
The longer loans are being driven by a number of factors, including stagnant wages and higher prices for new vehicles, which now cost an average of $34,400, according to information from Kelly Blue Book. Much of it’s also driven by consumers themselves, who increasingly opt for more expensive sport utility vehicles and cars with the latest technology, said Michelle Krebs, an analyst for Autotrader.
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The average loan amount for a new vehicle was $30,516 in the first quarter of this year, according to Experian, which tracks auto loan data. That’s up about 2 percent compared to last year and 23 percent compared to 2008, when the average loan was $24,780.
“We have been watching the loan terms grow for the last several years,” Krebs said. “On the plus side, it’s a way to keep the monthly payments down. On the negative side however, a consumer is in a negative position for a long time if they want to get out of that vehicle or trade. What we do know is the longer they’re in, the more dissatisfied they get with the vehicle and the brand.”
A monthly payment culture
Christina Walters of Springfield is almost done paying off a seven-year loan on a 2009 Honda Accord she purchased from the Jeff Wyler Springfield Auto Mall. The lengthy loan made the payments fit her budget, despite rolling over a few thousand in debt from her last car into the new purchase, she said.
At the time, she said she was mostly concerned with keeping the monthly payment low. But her car now has about 100,000 miles, despite often working from home. If she’d bought a less reliable car or faced a major financial setback, she said she easily could have been under water on the loan.
The car’s almost paid off now but she said the lengthy loan and negative equity was a mistake she won’t make again.
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“Ultimately it’s my responsibility to say no, I don’t want to do that,” Walters said. “But I kind of thought that was the only way I could do it with $3,000 in negative equity. I definitely don’t recommend it to anyone. I’m fortunate that my car’s still in great shape but you’ve got to take into consideration I don’t drive it much.”
The monthly payment is the priority for most car buyers, even if in the long run that means being stuck in a longer loan or paying more in interest, Caldwell said.
“A lot of times now people want to buy a larger crossover or truck that’s more expensive,” Caldwell said. “But we’re also a monthly payment culture so you’re not necessarily thinking to yourself of the total of everything you’re going to pay. A lot of folks are thinking, ‘I want those bells and whistles, and if I just extend my payment from 60 months to 65 months it’s not such a big deal.’”
Walters said she plans to keep her Accord for several more years but it’s still tempting sometimes to look at trading it in for a newer model. At seven years old, the car doesn’t have many of the features included in more recent models. But paying off the loan will leave a few hundred more dollars in her pocket each month.
“My daughter will have this,” Walters joked. “She’s seven now and she will have this car when she turns 16. I will never get rid of it.”
A lender’s perspective
Clark and Champaign County lenders have made longer car loans but said they’re reluctant to offer some of the longest terms, some of which can last seven years or longer.
John Brown, president of Security National Bank in Springfield, said in general the bank will offer loans of up to six years. . There’s some justification for allowing longer loans, he said, because although they’re more expensive, new vehicles also tend to last longer than they did in the past.
But the longer the loan, the greater the likelihood of the customer being stuck in a situation where they owe more than the vehicle is worth.
“We think in that six-year range for newer cars is as far as we want to go,” Brown said.
In Urbana, Perpetual Federal Savings Bank focuses more on real estate lending than auto loans because dealerships often offer lower interest rates through the manufacturer, said Mike Melvin, Perpetual president. With rising vehicle costs, the monthly payment to buy a new car or SUV is often too high for the average customer when spread over 36 or 48 months, he said. So he said manufacturers had to offer longer financing terms to sell the vehicles.
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The problem, Melvin said, is vehicles depreciate quickly so it’s easy to get underwater when drivers go to trade them in.
“When you get into 72 to 84 months, as a lender you start to get concerned about what the value of the car will be at the time of the trade-in or the sale,” Melvin said. “Especially if the car dealer is able to roll that balance into a new car loan, you’re going to have the same problem but compounded and pushed down the road. You’re just sort of kicking the can down the road and sooner or later a day of reckoning has to come.”
A 2017 report by Experian showed the percent of consumers opting for loans with terms of 73 to 84 months for a new vehicle crept up from 29 percent at the end of 2015 to 32 percent at the end of last year. That number also rose in the used car market from 16.4 percent at the end of 2015 to 18.2 percent at the end of last year.
It doesn’t make sense for banks like Perpetual to extend loans much further than they are, Melvin said.
“We stretched it out from 48 months to 60 to try to compete but by the time we do that, it seems like others stretch it out to 84 months,” Melvin said. “You’re just sort of chasing your tail and it gets to the point where you just can’t go after that market. Your exposure to risk and loss is much greater when you go longer because the value of the vehicle is depreciated.”
At the dealer
The demand for longer loan terms is typically driven by customers and isn’t likely to slack off any time soon, said Jeremy Fields, finance manager for Coughlin Automotive in London, Ohio. He saw a surge in loans of 84 months within the last month, which he attributed to demand for new vehicles with numerous features.
“I’m sure a lot of that has to do with the price of the vehicles,” Fields said. “You get into the larger SUVs or any of the bigger trucks and they’re not getting any cheaper, that’s for sure. They’re in the $60,000 to $70,000 range now so to make it affordable for most people, they’re extending terms rather than putting money down.”
Despite the spike in lengthier loans, both Fields and John Welch, finance manager at Bill Marine in Springfield, said dealers prefer shorter loans whenever possible because it means a customer is likely to return sooner.
Typically when a customer asks for payment options, Welch said he offers options for five or six years, or leasing options to present to a customer. A longer term is offered only when a customer ask for ways to keep the payment lower, he said.
Most of the loans the dealership offers are five or six years, Welch said.
“When you’re locally owned, the last thing you want to do is see a customer that’s unhappy because they’ve got too long of a loan,” Welch said.
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“The 84 months, we don’t do that many of them,” Welch said. “I don’t want to say it’s the wrong way but we’ve got a conscience and we don’t want to string somebody out any longer than they have to be.”
Since about 2012 Jeff Wyler has instead placed more emphasis on leasing, which typically offers lower monthly payments and allows customers to walk away at the end of the agreement or switch to another vehicle, General Manager Jay Lawrence said.
Customers can also buy the leased car at a predetermined price if they’re satisfied with the vehicle. Jeff Wyler now leases between 35 and 40 percent of its new cars.
“It keeps the payment a lot lower and you get into a new car every three years versus coming back in three years and finding out your car is worth less money than what you owe on it,” Lawrence said. “What you have to do at that point is you roll that money onto your new loan so you get even further in negative equity. Car dealers like people coming back every three years to buy cars.”
A report this month by Edmunds showed leasing appears to be leveling off this year for the first time after four years of steady growth. Leasing made up 31 percent retail new-vehicle sales in the first half of this year, down just slightly from a record high of 31.9 percent last year.
While most customers want expensive cars with more features, dealers also want to figure out ways to make their customers happy.
“The dealers want to sell cars,” Lawrence said. “They’ll stretch it out to make it work for the consumer. If you want to buy a car, I want to do everything I can to get you to buy that car.”
Despite reluctance from many lenders to offer the longest loans, Fields said it’s unlikely demand for longer terms will level off any time soon.
“As long as these prices keep increasing faster than people’s wages, the extended terms are going to be a little more prevalent,” Fields said.
Although consumers are stretching into longer loans, experts said there doesn’t appear to be much reason for concern yet for the overall economy like how the housing market collapse lead to the Great Recession.
Although delinquency rates crept up slightly between 2015 and 2016, lenders appear to have shifted more loans to customers with better credit to compensate, according to information from Experian. Lending to customers with the sub-prime and lower credit scores fell about 1.2 percent over that period, while lending to customers with the best credit scores ticked up about the same amount.
And the S&P/Experian Auto Loan Default Index, which tracks default rates across auto loans, actually showed defaults at a roughly seven-year low, said Charlie Chesbrough, a senior analyst with Cox Automotive.
“I don’t think at this point there’s anything to suggest the outstanding auto loans that we have now are really under any threat,” Chesbrough said. “As long as the economy is growing and creating jobs, we may see the default rate move around a little bit. But without any kind of underlying economic slowdown, I wouldn’t expect to see that default rate make any significant move.”
Fields, of Coughlin, noted the extended terms aren’t available to every customer.
“The banks that do offer those, you can’t come in with a lower credit score and get 84 months,” Fields said. “They just don’t offer that for the sub-prime customers.”
One danger of steadily rising loans though, is it keeps customers out of the car market for years, Chesbrough said.
“In some ways the market is kind of stealing from future buyers to sell to them today and tying them up for a very long time,” Chesbrough said. “That might come back to haunt the industry in the next couple years, but I don’t think it’s any kind of a contributing factor to see any kind of a significant decline like we saw in 2009.”
The Springfield News-Sun provides extensive coverage of the auto industry and its impact on Clark and Champaign counties. The News-Sun has covered investments by local auto parts suppliers, Ohio’s attempt to draw investment to new auto technologies and autonomous vehicles and stories on Honda’s impact on local employment.
By the numbers:
$24,780 — Average new vehicle loan amount 1st Quarter 2008
$30,516 — Average new vehicle loan amount 1st Quarter 2017
64 months — Average new vehicle loan term 1st Quarter 2008
68 months — Average new vehicle loan term 1st Quarter 2017