In order to attract buyers as new-car prices continue to increase, lenders in the U.S. auto industry are offering increasingly longer loans, including some that exceed eight years.
In the last quarter of 2012, a 65-month loan has become the average term for a new car reports Experian Information Solutions Inc. Compared with four years ago, when only 11 percent of new car loans were between 73 and 84 months, Experian says that percentage has now increased to 17 percent in that category.
Some buyers are even getting loans as long as 97 months for a new car, the Wall Street Journal
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The longer loan terms and lower interest rates have allowed consumers to on average pay a reduced monthly car payment, from $465 to $460, over the past four years despite a $3,000 increase in the price of a new car over the same time period. The current average price for a new car is $31,000 reports the Journal.
Just as with the housing market crisis in 2008, the risk both lenders and consumers face with longer loan periods is the possibility of a buyer having negative equity on their purchase, commonly referred to as being "upside down" or "underwater," in which the value of the car is less than the outstanding balance on the loan.
In such cases, it would be become more difficult for new car buyers to sell or trade in their cars in case they fell behind on their payments.
Additionally, because of the extended loan periods, buyers will be generally waiting longer to replace their vehicle, which would cut into future sales.
The upside, as least for manufacturers is that extended car loans would make it possible for people to buy more expensive vehicles than they might have otherwise been able to afford a few years ago.
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"Generally, the current economic and consumer environment is more favorable for longer terms as compared with prior periods," Ally Bank, the largest car financier, said in a written statement to the Journal. "The used vehicle market remains strong, current vehicle quality also helps to maintain appropriate values, and consumer credit profiles are improving."
JP Morgan Chase & Co. and other auto lenders declined to comment on the extended loan term trend in the U.S. auto industry reports the Journal.
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