Car loans stretching

Experts warn such financing risky for buyers
By Jack Mazurak

Toyota Financial Services is offering 84-month loans for vehicles, but financial and industry professionals warn stretching out payments that far puts the buyer in a bad place.

"I was floored when they started doing 72-month loans," financial adviser Chris McAlpin said. "A rule of thumb that I like is pay for it outright. But I understand that not everybody can."

As 2007 closes with about 16.1 million new-vehicle sales in the U.S., the lowest in nine years, the auto industry is grappling to push sales higher for 2008 and long-term loans can play a part.

Toyota cut back on incentive offers in late 2007 and began offering 84-month loans. Other automakers, including the Detroit 3, also offer long-term loans. But those loans, including Toyota's, are reserved for customers with sparkling credit.

The idea behind long-term loans is buyers can afford vehicles through lower payments. But such loans, over time, can trap consumers into paying significantly more than sticker price.

For instance, a person financing $25,000 at 7 percent interest would pay $377 a month on a 84-year loan, compared to $599 for a 48-month-loan. However, the person with the extra payments ends up paying about $31,700 because of the added interest. A person with a 48-month loan would pay about $3,000 less.

Buyers who want a new car after three or four years can end up owing more than the car is worth, a situation known as being upside down.

In a summary of trends for the new year, analysts at automotive Web site Edmunds.com predicted consumers increasingly will find themselves upside down on their car loans.

Edmunds.com found, of those who bought new cars in 2007 and traded in a used vehicle, 25.6 percent had negative equity in their trade-in. The average amount upside down was $4,059, the highest negative equity average on record.

Buyers often fold the negative equity into a new-car loan, and can end up owing Lexus-level money on a Toyota or Lincoln dollars on a Ford.

"Most people spend their entire life with a car note. That's not how to get ahead," McAlpin said.

"I'd say 36 months max. Put money down, buy a car you can afford. Don't get all the bells and whistles, get something that's a good value, something that's going to run a while."

He suggested people let go of cars as status symbols and drive something practical and affordable.

Terry Jackson, automotive writer for Bankrate.com, observed long-term loans are double-edged swords for automakers.

"As car prices rise and buyers want vehicles with luxury appointments, the only way to make the deal attractive is to offer lower monthly payments. This is especially true in today's marketplace, where new vehicles sales are spiraling downward. But lenders also know that the default rate on these longer loans is higher than on loans of 60 months or less," he wrote in a Dec. 21 column.

Consumers, including those with great credit, can see their situations drastically change in seven years.

"Buyers can lose their jobs, get sick, get divorced or experience another life event that prevents them from making the loan payment," Jackson said. "My advice? If you have to extend your car loan beyond five years and can't afford to put at least 20 percent down, scale back your car desires to something you can afford."

Several metro-Jackson dealers said they haven't seen much demand for 72- and 84-month loans. Rather, their customers pay cash, lease or take incentive options.

Larry Cruise, president of Fowler Buick Pontiac GMC in Brandon, said 10 percent of customers lease, 60 to 70 percent cut a check, particularly for Buicks and GMCs.

"The other 20 to 30 percent are financing. But we're really not seeing that (long-term financing.) When you can get zero percent at 60 months, it makes sense to go with that because you're getting free money," he said.

Shanehan Westphal, sales manager at Herrin-Gear Infiniti, said 40 percent of his customers lease, a good alternative to long-term loans when the buyer isn't going to keep the car more than five years anyway.

"If you're going to... finance it for five or six years and keep it for three, you're going to be in debt. You put yourself in a difficult situation. If you lease for three years, you come back in three and toss us back the keys. Who's the smarter person?" he asked.

He recalled a regular customer who sells high-end homes in Madison County. She puts on a lot of miles but gets a tailored lease allowing 45,000 miles a year for two years.

"She needs a higher-end vehicle when she's selling homes at $350,000 and up. Had she financed the vehicle for 60 months it would be worth little with 225,000 miles. Yes, she'll pay more on the lease payments but in two years, it's not her responsibility," he said.

"(Longer-term loans) are becoming more accepted than in the past. Probably 15 years ago, 48 months was a long time. The price of cars has gone up. But if you're buying and keeping it for three years, you're basically leasing anyway."


In your voice
Read reactions to this story

Hookadawgup wrote:

At some point prices of vehicles are either going to have to come down or stay stagnant. Even the so called 'cheap cars' are running 28-36K. When buying a new car most people cannot afford large down payments, much less to pay the entire amount out -right. The only other option is to go with special financing offers. 1.9% over 72 months. 0% in 60. Which honestly, really makes sense. I'd rather take that lump sum check that I'd pay on a new car and put it into a mutual fund earning 8-28% (or greater) interest, and buy a car at 0-1.9% interest over a longer period of time. Really the bottom line is, the auto industry is going to be in a major, major bind over the next 10 years. A car is only worth so much. For most, there is a cut off point where the buyer simply won't pay that amount. That's why I believe Smart Car types will cut into the traditional manufacturers sales over the next several years. You can get a Smart Car for 12K.
1/2/2008 12:22:10 PM

AESmom wrote:

If some people in Jackson would let go of the status symbols and buy cars that they can afford, this would not be an issue. I see so many high end vehicles parked in front of low end apartments. It all goes to show that some people don't have their priorities in the right place. If you have to stretch a loan for 84 months, chances are you can't afford it anyway. Drive a Honda...buy a house.
1/2/2008 10:51:41 AM

TechSuperGirl wrote:

Now, this is just great! On top of the fact that these cars are WAY over priced, who needs a car loan for almost 10 years! People need to realize, they will be paying top dollar for a car, that after the first couple of months out of the dealership, won't be worth the monthly note! Not to mention, Toyota will price the car at a sticker amount, when you factor in the interest, it will skyrocket the overall payments for the vehicle. This is just a testament to how bad things have gotten in this country. Obviously, if you need to stretch payments out that far, you can't afford the vehicle. People, find a reputable used car lot, do your homework, and purchase a great used car. Also, people who have vehicles that are paid for, take care of them, this is getting out of hand.
1/2/2008 9:43:30 AM


PaulWBrown wrote:

No dobut there will be a market for these extended time car loans. It is a sad commentary on the American public's spending / buying habits. It is not how much will it cost me in the long run or how much interest I have to pay, but what is the monthly payment?
1/2/2008 6:08:58 AM

original post found here.