Long-Term Used Car Loans: Is This Really Good For Consumers?

Yes, its a sign that the economy is recovering. Not only are car sales up, consumers are stretching out their loans to afford the monthly payments. However, its not just new-car loans, but used-car loans, too, as we learned from an article that appeared in a recent publication of Automotive News. Forty-eight percent of used-car buyers in the first three months of this year opted for payments that expand beyond 5 years, according to Experian Automotive. Eleven percent of consumers are opting for used- car loans that extend from 73 months to 84 months, during the first quarter of 2013. This is up by 23 percent from the same period in 2012.

Thirty-seven percent of consumers have opted for a used-car loan that expands from 61 months to 72 months for the first quarter of 2013, up 6 percent from the same period in 2012.

Could trouble be brewing if consumers consider this trend? We think so! In many cases, used car interest rates are higher than new-car rates, since many of those are subsidized by the automakers' finance arm, especially if consumers qualify for low-cost loans. When consumers move to the used car lots, interest rates typically rise, unless the consumers qualifies for a low-interest subsidized loans offered by automakers when purchasing some certified vehicles.  Just like with consumers stretching out their new-car loans, trouble could be brewing. Before consumers consider opting for a stretched loan or what we term as a 'car mortgage', they should consider stepping-down to a more affordable vehicle or possibly switch to a new-car, which offers a lower interest rate and a new-vehicle warranty which covers the vehicle at minimum for 3 years.

So, what happens when payment sensitive consumers stretch out their car loans on a high mileage vehicle over 5 years and they began to experience mechanical problems with the vehicle? Will they have money set aside in their budget to cover service repairs? Will consumers be stuck paying for a ride with mechanical issues or better yet, one that might now be drivable? Or will the consumers end up defaulting on the loan?