Tags: car | auto | loan | term

Car Craze: Auto Debt Skyrocketing in America

By    |   Monday, 09 June 2014 02:01 PM

A growing number of Americans are willing to spend the better part of a decade paying for a new vehicle, data from Experian Automotive show.

During the first quarter, the average auto-loan term increased to 66 months, the highest level since Experian began reporting data in 2006. And nearly 25 percent of new vehicle loans ranged from 73 to 84 months, up 27.6 percent from a year earlier, notes Wall Street Cheat Sheet.

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Meanwhile, auto loans ranging from 25 months to 72 months declined.

“Over the past several years, 72-month-term loans have become the norm for auto financing,” Automotive News says Melinda Zabritski, senior director of automotive credit at Experian Automotive, explained.

“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,” Zabritski noted.

This trend is “a natural consequence of those folks that were excluded from the market who are now returning and using these loans,” specifically young, first-time buyers and those with unfavorable credit, Thomas King, senior director of the J.D. Power and Associates' Power Information Network, told Automotive News.

Consumers must be careful warns Zabritski. A longer-term loan offers the benefit of a lower monthly payment, but there is a “flip side.”

“Consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early. It is definitely a choice that consumers will want to weigh carefully before making a final purchasing decision,” she said.

Auto industry professionals claim they're keeping a close eye on the market looking for any housing-style bubbles, and they say they aren't seeing any red flags, says Automotive News.

Delinquency rates is one metric they watch as 22 states saw an increase in 60-day delinquencies during the first quarter, but according to Experian, overall the nation's delinquency rate fell, remaining below pre-recession levels.

“Consumers are doing an excellent job managing their debt load,” said Zabritski.

Bruce Jackson, head of retail lending for Chase Auto Finance, made a similar observation, telling Automotive News, “Consumers have remained prudent. Lending institutions have remained prudent.”

But Wall Street Cheat Sheet says taking on long-term loans to make payments manageable is not the same as buying what is affordable. If the only way consumers can purchase a car is through a 6- or 7-year loan, they can't really afford it, and should consider buying a used vehicle, writes Eric McWhinnie.

Auto consumers should set rules, he says. A good one is the 20/4/10 rule: Put down at least 20 percent, finance the vehicle for no longer than four years and avoid total monthly vehicle expenses (including principal, interest, and insurance) exceeding 10 percent of gross income.

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A growing number of Americans are willing to spend the better part of a decade paying for a new vehicle, data from Experian Automotive show.
car, auto, loan, term
Monday, 09 June 2014 02:01 PM
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