In the latest sign Americans are increasingly comfortable taking on more debt, auto buyers borrowed a record amount in the first quarter with the average monthly payment climbing to an all-time high of $474.
Not only that, buyers also continued to spread payments out over a longer period of time, with 24.8 percent of auto loans now coming with payment terms between six and seven years according to a new report from Experian Automotive.
That's the highest percentage of 6 and 7-year loans Experian has ever recorded in a quarter.
"I'm not surprised consumers are borrowing more or taking out longer auto loans," said Melinda Zabritski of Experian Automotive. "With relatively low interest rates, buyers are more comfortable taking out longer loans so they can keep their monthly payment as low as possible."
Experian (EXPR), analyzed approximately 4.7 million new and used auto loans written between January and March.
Those loans totaled $100.7 billion, a record amount for auto loans written in any quarter in the U.S. The average length of auto loans increased by one month to five and half years, a new all-time high, it said.
"Consumers are really relying on financing as the price of new vehicles continues to move higher," said Zabritski.
In the first quarter, the average auto loan jumped $964 to $27,612, an all-time high, according to Experian. Just five years ago, the average auto loan was $24,174.
Longer Loans, Owning Cars Longer
One reason almost one out of every four auto buyers took out a loan with repayment terms between six to seven years is because they're holding on to their vehicles longer.
%VIRTUAL-article-sponsoredlinks%IHS Automotive says the average American is holding on to their new vehicle for six years and one month. A decade ago, the average length of ownership was four years and two months.
"The days of buying a new car every three to five years are gone," says Mark Seng with IHS Automotive. "With vehicles lasting longer and having more technology, buyers are clearly willing to own their cars six or seven years, often longer."
The one risk for buyers taking out seven-year auto loans is the chance they'll be "upside down" and owe more than their vehicle is worth if they try to sell it before the loan is paid off.
"With a seven-year loan, you really need to pay off at least five or five and half years to avoid having negative equity with the vehicle," says Zabritski.
Leasing Taking Off
As new vehicle prices have edged higher, a growing number of consumers have decided to not take out an auto loan with an average monthly payment of almost $500. Instead, they are leasing vehicles and locking in lower monthly payments for three or four years.
"Our leasing business is up 20 percent this month," said Dave Fisher, Chairman and CEO of the Suburban Dealership Group in the Detroit metropolitan area. "People are turning to leasing because it makes more sense than taking out a loan, especially for premium models."
Even for mass market models, the difference in the average monthly payments for those leasing and buying a new vehicle is substantial.
The average monthly payment for those leasing was $347 in the first quarter according to Experian. By comparison, the average monthly payment last quarter was almost $100 lower for those leasing, at $251.
"On average, leasing is about $100 less every month and that's one reason leasing has become more popular," Zabritski says.
10 Easy Ways to Pay Off Debt
Auto Buyers Set New Records, Load Up On Longer Loans
"Your daily habits and routines are the reason you got into this mess," writes Trent Hamm, founder of TheSimpleDollar.com. "Spend some time thinking about how you spend money each day, each week and each month." Do you really need your daily latte? Can you bring your lunch to work instead of buying it four times a week? Ask yourself: What can I change without sacrificing my lifestyle too much?
Remove all credit cards from your wallet and leave them at home when you go shopping, advises WiseBread contributor Sabah Karimi. “Even if you earn cash back or other rewards with credit card purchases, stop spending with your credit cards until you have your finances under control,” she writes.
If you do a lot of online shopping at one retailer, you may have stored your credit card information on the site to make the checkout process easier. But that also makes it easier to charge items you don't need. So clear that information. "If you’re paying for a recurring service, use a debit card issued from a major credit card service linked to your checking account," Hamm writes.
Reward yourself when you reach debt payoff goals. "The only way to completely pay off your credit card debt is to keep at it, and to do that, you must keep yourself motivated," Bakke writes. Just make sure to reward yourself within reason. For example, instead of a weeklong vacation, plan a weekend camping trip. "If you aim to reduce your credit card debt from $10,000 to $5,000 in two months," Bakke writes, "give yourself more than a pat on the back."
“Establish a budget,” writes Money Crashers contributor David Bakke. “If you don't scale back your spending, you'll dig yourself into a deeper hole." You can use personal finance tools like Mint.com, or make your own Excel spreadsheet that includes your monthly income and expenses. Then scrutinize those budget categories to see where you can cut costs.
Sort your credit card interest rates from highest to lowest, then tackle the card with the highest rate first. "By paying off the balance with the highest interest first, you increase your payment on the credit card with the highest annual percentage rate while continuing to make the minimum payment on the rest of your credit cards," writes Mint.com spokeswoman Hitha Prabhakar.
To make a dent in your debt, you need to pay more than the minimum balance on your credit card statements each month. "Paying the minimum -– usually 2 to 3 percent of the outstanding balance -– only prolongs a debt payoff strategy," Prabhakar writes. "Strengthen your commitment to pay everything off by making weekly, instead of monthly, payments." Or if your minimum payment is $100, try doubling it and paying off $200 or more.
If you have a high-interest card with a balance that you’re confident you can pay off in a few months, Hamm recommends moving the debt to a card that offers a zero-interest balance transfer. "You’ll need to pay off the debt before the balance transfer expires, or else you’re often hit with a much higher interest rate," he warns. "If you do it carefully, you can save hundreds on interest this way."
Have any birthday gifts or old wedding presents collecting dust in your closet? Look for items you can sell on eBay or Craigslist. "Do some research to make sure you list these items at a fair and reasonable price," Karimi writes. “Take quality photos, and write an attention-grabbing headline and description to sell the item as quickly as possible." Any profits from sales should go toward your debt.
If you receive a job bonus around the holidays or during the year, allocate that money toward your debt payoff plan. "Avoid the temptation to spend that bonus on a vacation or other luxury purchase," Karimi writes. It’s more important to fix your financial situation than own the latest designer bag.