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1-in-5 New Car Buyers Opt for 7-year Auto Loans

Remember the days when most auto loans were for 48-month or 60-month.  Anything longer than that were reserved for a premium luxury cars that cost double of average priced cars.  More new car buyers are stretching out their loan payments as far as 84 months which is probably longer than how long they expect to keep the car.

Auto loans with longer terms between 73 to 84 months have jumped 25% last year and makes up 19.5% of total new car loans.  Additionally, loans ranging from 61 to 72 months takes up 41.7% of total.  That's a stagger number of long-term loans with 61.2% of loans having payment schedule longer than 60 months.

The phenomenon marks a turnabout from the Great Recession, when lenders were tight with even shorter-term car loans. Now, low interest rates, near-record low loan delinquency rates, high average used-car prices and cars lasting longer all appear to be contributing to the trend.

Also having an effect: old trade-ins. The average age of vehicles on the road is about 11 years, while the average transaction price of a new vehicle has gone from $25,703 in 2002 to $30,592 now, according to researcher TrueCar.

So people finally trading for a new model might have 11-year-old trade-ins worth nearly nothing, even as they try to buy new vehicle priced thousands of dollars more than when they last bought.

Long-term loans with lower payments might be the only answer for those buyers, even though they'll pay more overall than with a shorter loan.

"It's definitely market driven," says Allen Foster, general manager of Smart Motors in Madison, Wis."Customers want a vehicle, but have a budget to work within." At his big Toyota dealership, 16% of loans now average 72 months or longer, up from 11% as recently as 2010.

At the average new-car interest rate of 3.94%, the monthly payment on a $28,000, 48-month loan would be $631.46. That works out to a $30,310.08 repayment, including the $2,310.08 in interest. Same deal, 84 months: $381.95 monthly payment, for a total of $32,083.80 paid, or $4,083.80 in interest.

Thus, the longer loan costs the borrower $1,773.72 more in interest. That probably understates the real difference, because longer loans often carry higher interest rates than shorter loans.

"You end up 'upside down' (owing more than the car is worth) for a longer time," says Greg McBride, senior financial analyst for "You are going to pay down the balance at a snail's pace while the vehicle depreciates rapidly."

That may force some people to keep their new car much longer than they used to which in turn may affect the used car market.  Less supply in the used car market means higher price.

1-in-5 New Car Buyers Opt for 7-year Auto Loans Reviewed by Blogs on 1:32 AM Rating: 5

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