Why Sub-$500-a-Month Auto Loans Are a Bad Habit
By Phil LeBeau
Auto loans stretching six or seven years are often criticized as a poor choice because they leave borrowers underwater for years before they finally get to a point where the vehicle is no longer in negative equity.
Still, the latest snapshot of America's booming auto market shows these longer auto loans are quickly becoming a popular choice for car and truck buyers.
Experian, which tracks America's auto finance market, says loans with terms of six to seven years are showing the fastest growth.
In the third quarter of this year, the proportion of auto loans of 73 to 82 months jumped 17.1 percent compared with the same period a year ago, with more than a quarter of all auto loans now stretching out more than six years.
"[Those] loans are becoming more popular because so many consumers are now looking to keep their monthly payment under $500," said Melinda Zabritski, Experian's senior director of automotive finance. Zabritski says the average monthly payment last quarter was $482.While more buyers are paying for their new vehicle over 6½ or seven years, the most popular term length for auto loans remains 61 to 72 months. In the third quarter, more than 40 percent of new vehicle loans had terms of 5½ to six years, according to Experian. The average length of an auto loan is currently 67 months.
The appeal of longer loans is obvious, but veterans of the auto industry say it's become a bad habit for lenders and consumers.
"Eighty-month paper to me is a dangerous thing because the customer spends a lot of their time being in negative equity." said Bob Lutz, former vice chairman of General Motors.
Six- and seven-year auto loans are becoming the primary length for financing new vehicle purchases partially because automakers and dealers are increasingly advertising their latest promotions with 72-month loans. In some ways, those ads have conditioned consumers to believe that it's OK to stretch monthly auto payments over longer terms.
In many dealerships, it's all about keeping a monthly payment under $500.