WASHINGTON – U.S. automobile sales are sizzling in part because Americans increasingly are taking out longer and longer loans to purchase used and new vehicles.
That U.S. consumers are unleashing pent-up demand after holding off on buying new cars is good news. But it may be a problem that many of these purchases are made with loans that stretch over long periods of time, many extending well beyond the four-year period when many Americans trade in their vehicles.
“We’re seeing a lot of subprime loans, loans that are over 10 percent interest and very long-term loans, as long as 72 months, which lowers the monthly payment,” said Michelle Krebs, the director of automotive research for AutoTrader.com.
Four-year car loans used to be the norm, which then became five-year loans. From April through June of this year, 41 percent of new-car loans were for financing over about six years, according to credit analysis firm Experian.
About 14 percent of used car loans were for periods between six and seven years, the Experian data show.
“A lot of times the car dies long before they can pay off the loan, or there is an expensive repair that they can’t afford, so they trade it in,” said Rosemary Shahan, the president of the California-based consumer advocacy group Consumers for Auto Reliability and Safety.
“The loans are disproportionate to the value of the car. The car is a depreciating asset, and it is going to be worth even less as time goes on, and that negative equity gets rolled into the next loan.”
The long-term loans could result in snowballing debt.
“It’s something we keep an eye on,” said Melinda Zabritski, the senior director of automotive finance for Experian, which shared the quarterly data with McClatchy. “Consumers are certainly trying to keep the payments as low as possible in a market where vehicles are becoming more expensive.”