The 7-Year Auto Loan: America's Middle Class Can't Afford Its Cars

For the past few years, we've been addressing this issue on Auto Trends with JeffCars.com with our auto analysts, what is the tipping for these car prices. Every time we get behind the wheel of a new car, the sticker can easily range from $40,000 to $90,000 as if most of us can make those payments without batting an eye. However, according to this article that appeared in Wall Street Journal their finally echoing what we've been talking about, as the middle class is beginning to scream mercy.

Walk into an auto dealership these days and you might walk out with a seven-year car loan.

Editor's Commentary: Stretching Car Notes Into 'Car Mortgages' Is Leading To More Buyers Being Late On Payments

We all have wants and desires. About a decade ago I penned an article for a national financial publication on consumers steering into ‘Car Mortgage’ territory. The coined term is still appropriate today, as the average transaction price of a new car climbing to approximately $36,500.

Credit Unions Back Off Long-Term Loans

Credit unions, which in recent years aggressively increased the lengths of their loans, reduced their average loan maturity last year.

Auto manufacturers' 0 percent financing promotions prompted credit unions to stretch loan terms to 72 months or more. Lengthening the term lowers the monthly payment.

But credit unions now appear to be backing away from extended terms.

In 2009, the largest portion of credit union car loans -- 41 percent -- ranged from 49 to 60 months long, down from 2008's most common range of 61 to 72 months, reports Credit Union Direct Lending. CUDL is a portal that allows dealers to provide retail auto loans to consumers through more than 780 credit unions.

The average term for a new-vehicle loan was 70 months in 2009, down from 72 months in 2007 and 71 months in 2008. For used vehicles, the average was 63 months last year, down from 65 months in the prior two years, reports CUDL, of Ontario, Calif.

Ten Steps to Getting the Best Auto Loan

According to a study that was released in January 2014, black and Latino consumers continue to pay more when financing a vehicle. The key to driving the best deal home, as it relates to financing is to have a keen understanding of the credit process and what your credit can purchase. As of 2001, “The Consumer Credit Score Disclosure Act” now provides all consumers access to their credit/FICO (Fair Isaac Corporation) score. With all of the tools available today, there is no need to remain in the back seat as an uninformed consumer.

To make sure you remain in the driver's seat, when securing a loan.....

1. Access your credit score and report. By accessing your credit score and report via the credit reporting agencies, this will not affect your score. If you allow your lenders to access your credit report and score, this could affect your credit score.

2. Review and analyze your credit report for accuracy.

3. If there are inaccurate items on your credit report, this could affect your credit score, the interest rate you’re assigned and/or decrease your chances of being approved for a loan. The higher the credit score, the better chance you have of receiving a lower interest rate.

4. If there is inaccurate information on your credit report, take the appropriate steps provided by the credit reporting source to resolve any concern. Make sure you provide appropriate documentation to resolve your concern.

Auto Financing: Will New Legislation Protect Dealers Over (Minority) Consumers?

As a result of the economic turmoil, causing the meltdown of the economy both domestically and internationally, the House Financial Services Committee passed legislation to create a Consumer Federal Protection Agency.

This agency will be responsible for regulating financial products such as mortgages and credit and debit cards. Ironically, auto loans will be excluded from the mix.

While a number of watch dog groups believe dealers should be regulated, too, as a result of a number of studies over the years indicating predatory finance lending practices against minorities, NADA (the National Auto Dealer Association), a national advocacy organization for new-vehicle dealers have worked tirelessly to keep dealership assisted financing outside of the authority of the Consumer Financial Protection Agency.

It is not clear whether the current bill will pass the House and Senate or if the dealership will continue to be exempt, according to Automotive News. While the bill currently favors the dealers, the Consumer Federation of America like a number of consumer advocacy groups believe consumers receiving financing through car dealer deserved to have the same type of umbrella protection as credit card holders and folks with mortgages.

Until this issue is resolved, consumers should make sure they shop around for financing.

Car Mortgages:The Latest Trend in Car Financing

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.

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:

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

Would you finance a car for seven or eight years? In some countries, consumers are allowed to finance their vehicles for ten years!