After receiving a few inquires about consumers stretching out their car loans, also known as "car mortgages," I decided to research this topic for an article I wrote for Black Enterprise magazine.
Would you finance a car for seven or eight years? In some countries, consumers are allowed to finance their vehicles for ten years!
Could you imagine financing your next car for seven or eight years? According to a study by the Consumer Bankers Association, 58% of new vehicle loans in 2006 were for terms of six years or more, up by 3% from 2005. In used-vehicle loans, 48% were for six years or more, up from 40% for 2005.
What's driving consumers to opt for extended term auto loans? Michelle Singletary, syndicated personal finance columnist and host of her own show on TVOne, says, "People are doing it because they want more car than they can afford, and the only way to do that is to get a car payment longer than some people are married." Based on my personal analysis, like Singletary, I believe consumers are not purchasing vehicles within their budget, they aren't putting down a sizable down payment nor or they paying off their trades.
With a new vehicle costing an average of $29,024 in the third quarter of 2007, it took 24.8 weeks of median family income to purchase a vehicle, up .4 weeks compared to a year ago, according to Comerica Bank's Automobile Affordability Index. Moreover, in 2006 more than 36% of consumers were upside down - owing more on the vehicle than it's actually worth at the time of trade-in- based on data provided by the Power Information Network. Consumers financing their vehicles for three years or less owed an average of $3,588 on their trade, while those financing their vehicles for eight years or more owed an average of $5,157 at the time of trade in 2006.
Based upon the current economic climate, we know that the aforementioned numbers will continue to increase. Toyota Financial services recently announced they are now offering 7-year auto loans. Below is the typical profile of AmeriCredit extended term customers:
What's driving consumers to opt for extended term auto loans? Michelle Singletary, syndicated personal finance columnist and host of her own show on TVOne, says, "People are doing it because they want more car than they can afford, and the only way to do that is to get a car payment longer than some people are married." Based on my personal analysis, like Singletary, I believe consumers are not purchasing vehicles within their budget, they aren't putting down a sizable down payment nor or they paying off their trades.
With a new vehicle costing an average of $29,024 in the third quarter of 2007, it took 24.8 weeks of median family income to purchase a vehicle, up .4 weeks compared to a year ago, according to Comerica Bank's Automobile Affordability Index. Moreover, in 2006 more than 36% of consumers were upside down - owing more on the vehicle than it's actually worth at the time of trade-in- based on data provided by the Power Information Network. Consumers financing their vehicles for three years or less owed an average of $3,588 on their trade, while those financing their vehicles for eight years or more owed an average of $5,157 at the time of trade in 2006.
Based upon the current economic climate, we know that the aforementioned numbers will continue to increase. Toyota Financial services recently announced they are now offering 7-year auto loans. Below is the typical profile of AmeriCredit extended term customers:
Annual income: $70,000 to $75,000
FICO (Credit) score: 670 - 800
Years at present employer: 9
Years of current credit history: 17
Percentage that are homeowners: 83%
Average amount financed: $25,200
Average annual percentage rate (APR): 9.5%
Specialty prime customers average finance terms: 7 years and 1 month
Source: AmeriCredit
Years at present employer: 9
Years of current credit history: 17
Percentage that are homeowners: 83%
Average amount financed: $25,200
Average annual percentage rate (APR): 9.5%
Specialty prime customers average finance terms: 7 years and 1 month
Source: AmeriCredit
Would you finance a car for seven or eight years? In some countries, consumers are allowed to finance their vehicles for ten years!
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1 comment:
I do not believe that financing a car for 7 or 8 years is a good financial decision. When we extend a loan for that amount of time, we are paying far more than the car is worth, not taking into consideration the depreciation value of the car. I agree with your comment that consumers are not purchasing cars within their budget. A lot of us are just trying to keep up with the Jones' or trying to impress the next man.
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