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More Americans Opt For Risky Long-Term Car Loans: NPR

More Americans Opt For Risky Long-Term Car Loans

Almost a third of fresh auto loans now last seventy four months or longer, which alarms some analysts. iStockphoto hide caption

Almost a third of fresh auto loans now last seventy four months or longer, which alarms some analysts.

There comes a day in every car holder’s life when she knows, it’s time. For Carolyn Ballard of Atlanta, that was on a hot day last July, while driving her SUV with misfiring cylinders.

“I drove to the dealership with the car literally chugging along,” she says. “I mean, in traffic on the interstate. I was just sweating, thinking I’ve just got to get to the dealership so I can get rid of this, before I put any more money into it.”

Ballard desired a late-model Honda Accord that she’d seen on the dealership’s website. By the time she got there, it was gone. But there were slew of fresh Accords.

“I don’t know what the average marriage lasts in the U.S. today. Might be less than the average car loan.”

Honda Executive Vice President John Mendel

“I said, ‘If you can get my payments under $250 a month I will consider taking this car,’ ” she says.

No problem. Ballard got a loan from Wells Fargo at a rate of Two.Five percent. But for seventy four months. That’s six years.

Six-year car loans used to be in the minority. They’re now the norm, and loans of seven or eight years are even becoming popular. New-car sales in the U.S. are thriving, and longer car loans are playing a role. Almost a third of fresh loans are now seventy four months or longer.

But some worry the trend will hurt the auto industry in the future. Others worry it’s hurting consumers right now. Ed Kim, an analyst with AutoPacific, says one thing driving the trend is the cars themselves.

“Consumers are requiring a lot more technology in their vehicles, infotainment technologies,” he says. “There’s also a lot more safety features that are in vehicles right now. Emissions and efficiency technology that are in vehicles right now, that are making vehicles cost a lot more.”

But Kim says the main reason is many consumers haven’t recovered from the recession. So that fresh car payment has to be opened up out over more years.

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Melinda Zabritski isn’t too worried for consumers. She’s with Experian Automotive, a subsidiary of the credit rating agency Experian, and says longer car loans often make sense, especially for people on a taut budget.

“Well, if we all had the luxury to take a 36- or 48-month term, but the bottom line is you know the average consumer just can’t afford that,” she says.

That reasoning drives consumer advocate Mike Sante nuts. He’s with Interest.com and says people on a budget are precisely the ones who shouldn’t be taking out long loans.

“They’re a way to get people into cars that are more expensive than they should indeed be buying,” he says. “It’s these kinds of decisions that you make, that will truly determine how much money you have later in life.”

Sante argues that people should pay off their cars within four years, which can mean buying a less expensive or used car.

While it’s relatively effortless to get a long loan at certain automakers, Honda is attempting to buck that trend. After all, the equity that owners still have in their vehicles come trade-in time is a big selling point for Honda. Long loans demolish that equity.

Honda Executive Vice President John Mendel says loans beyond five years are just too long to pay off a car.

“I don’t know what the average marriage lasts in the U.S. today,” he says. “[It] might be less than the average car loan.”

Mendel hopes his competitors begin using more discipline. But that may be wishful thinking. When interest rates go up, a fresh car will become even more expensive, which is likely to thrust more consumers into longer loans.

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