Are Longer Term Loans Making A Comeback, Again?

According to J. D. Power, longer term loans are on the rise again. Could this be a sign that the economy is rebounding? Over the past few years, since the bottom fail out of the housing market, lenders were not only putting a choke hold on home loans, but car loans too. However, lately better days seem to be ahead. Just this past month, sales of new vehicles rose to a level not seen since the Obama administration artificially induce sales by way of the controversial, but extremely effective government-run 'Cash For Clunkers Sale,' where consumers were given upwards of $4,500 in assistance to trade-up to a new vehicle.

With that said, the majority of consumers still rely on loans to get into a vehicle.  In 2011, loans of 73 months and longer  so far accounted for 9 percent of new-vehicle loans, according to J. D. Power. This is up from 6 percent in 2009 and 2010 and close to the peak of 10 percent in 2008, reports consulting firm J.D. Power and Associates.

Ironically, the average loan in 1975 was 37.6 months, when the average retail sales price of a vehicle was approximately $4,750. Today, the average loan has almost doubled to 63.03 months. And the average price of a vehicle has been driven up almost seven times from that of the seventies to $27,959, according to an article I came across in Automotive News, an industry trade journal.

Well this is good news for consumers, since auto lenders are allowing consumers to stretch out their loans again. These stretchable loans are also known as 'Car Mortgages' too. The editor of this website wrote an article about this topic a few years ago. To read the Black Enterprise article, click here.

Now while lenders are being generous again. We caution our readers to think twice about stretching out the loan. The real question to ask yourself: Are you buying more car than what you can afford?

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.

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!