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Buyers spread out car loans to record lengths to lower monthly bills
Clark County lenders, dealers say customers looking for lower monthly payments.
Posted: 6:00 a.m. Monday, July 24, 2017
The length of loans for fresh vehicles hit an all-time high last month, as buyers took on more debt and opened up their budgets for increasingly expensive cars and trucks.
The average length of an auto loan hit a record of Sixty nine.Three months in June, according to research from Edmunds.com, up almost seven percent compared to five years ago. And Clark County lenders said it’s no longer uncommon to see loans open up into seven years or longer as buyers look for ways to keep monthly payments in check.
Five years ago, the average length was 64.9 months, said Jessica Caldwell, Edmunds executive director of industry analysis.
While not a concern by itself, analysts and Clark County lenders said longer loans often carry significant risks for buyers who could end up saddled with debt. Or in some cases, they could end up stuck in a loan that costs more than the vehicle is worth.
“If someone’s going to buy a fresh car and drive it until the wheels fall off, it’s fine as long as they get a low interest rate,” Caldwell said. “However, that’s not what people do. They buy these cars and they want to get a fresh car in five years before the loan gets paid off and they can get into a situation where they have negative equity on their loan, which puts them in a worse situation for their next purchase. They owe more than its worth and they’re rolling that negative equity into their next loan.”
The longer loans are being driven by a number of factors, including stagnant wages and higher prices for fresh vehicles, which now cost an average of $34,400, according to information from Kelly Blue Book. Much of it’s also driven by consumers themselves, who increasingly opt for more expensive sport utility vehicles and cars with the latest technology, said Michelle Krebs, an analyst for Autotrader.
The average loan amount for a fresh vehicle was $30,516 in the very first quarter of this year, according to Experian, which tracks auto loan data. That’s up about two percent compared to last year and twenty three percent compared to 2008, when the average loan was $24,780.
“We have been watching the loan terms grow for the last several years,” Krebs said. “On the plus side, it’s a way to keep the monthly payments down. On the negative side however, a consumer is in a negative position for a long time if they want to get out of that vehicle or trade. What we do know is the longer they’re in, the more dissatisfied they get with the vehicle and the brand.”
Christina Walters of Springfield is almost done paying off a seven-year loan on a two thousand nine Honda Accord she purchased from the Jeff Wyler Springfield Auto Mall. The lengthy loan made the payments fit her budget, despite rolling over a few thousand in debt from her last car into the fresh purchase, she said.
At the time, she said she was mostly worried with keeping the monthly payment low. But her car now has about 100,000 miles, despite often working from home. If she’d bought a less reliable car or faced a major financial setback, she said she lightly could have been under water on the loan.
The car’s almost paid off now but she said the lengthy loan and negative equity was a mistake she won’t make again.
“Ultimately it’s my responsibility to say no, I don’t want to do that,” Walters said. “But I kind of thought that was the only way I could do it with $Trio,000 in negative equity. I undoubtedly don’t recommend it to anyone. I’m fortunate that my car’s still in excellent form but you’ve got to take into consideration I don’t drive it much.”
The monthly payment is the priority for most car buyers, even if in the long run that means being stuck in a longer loan or paying more in interest, Caldwell said.
“A lot of times now people want to buy a larger crossover or truck that’s more expensive,” Caldwell said. “But we’re also a monthly payment culture so you’re not necessarily thinking to yourself of the total of everything you’re going to pay. A lot of folks are thinking, ‘I want those bells and whistles, and if I just extend my payment from sixty months to sixty five months it’s not such a big deal.’”
Walters said she plans to keep her Accord for several more years but it’s still tempting sometimes to look at trading it in for a newer model. At seven years old, the car doesn’t have many of the features included in more latest models. But paying off the loan will leave a few hundred more dollars in her pocket each month.
“My daughter will have this,” Walters joked. “She’s seven now and she will have this car when she turns 16. I will never get rid of it.”
Clark and Champaign County lenders have made longer car loans but said they’re reluctant to suggest some of the longest terms, some of which can last seven years or longer.
John Brown, president of Security National Bank in Springfield, said in general the bank will suggest loans of up to six years. . There’s some justification for permitting longer loans, he said, because albeit they’re more expensive, fresh vehicles also tend to last longer than they did in the past.
But the longer the loan, the greater the likelihood of the customer being stuck in a situation where they owe more than the vehicle is worth.
“We think in that six-year range for newer cars is as far as we want to go,” Brown said.
In Urbana, Perpetual Federal Savings Bank concentrates more on real estate lending than auto loans because dealerships often suggest lower interest rates through the manufacturer, said Mike Melvin, Perpetual president. With rising vehicle costs, the monthly payment to buy a fresh car or SUV is often too high for the average customer when spread over thirty six or forty eight months, he said. So he said manufacturers had to suggest longer financing terms to sell the vehicles.
The problem, Melvin said, is vehicles depreciate quickly so it’s effortless to get underwater when drivers go to trade them in.
“When you get into seventy two to eighty four months, as a lender you begin to get worried about what the value of the car will be at the time of the trade-in or the sale,” Melvin said. “Especially if the car dealer is able to roll that balance into a fresh car loan, you’re going to have the same problem but compounded and shoved down the road. You’re just sort of kicking the can down the road and sooner or later a day of reckoning has to come.”
A two thousand seventeen report by Experian demonstrated the percent of consumers opting for loans with terms of seventy three to eighty four months for a fresh vehicle crept up from twenty nine percent at the end of two thousand fifteen to thirty two percent at the end of last year. That number also rose in the used car market from 16.Four percent at the end of two thousand fifteen to Legitimate.Two percent at the end of last year.
It doesn’t make sense for banks like Perpetual to extend loans much further than they are, Melvin said.
“We spread it out from forty eight months to sixty to attempt to rival but by the time we do that, it seems like others spread it out to eighty four months,” Melvin said. “You’re just sort of pursuing your tail and it gets to the point where you just can’t go after that market. Your exposure to risk and loss is much greater when you go longer because the value of the vehicle is depreciated.”
The request for longer loan terms is typically driven by customers and isn’t likely to slack off any time soon, said Jeremy Fields, finance manager for Coughlin Automotive in London, Ohio. He witnessed a surge in loans of eighty four months within the last month, which he attributed to request for fresh vehicles with numerous features.
“I’m sure a lot of that has to do with the price of the vehicles,” Fields said. “You get into the larger SUVs or any of the fatter trucks and they’re not getting any cheaper, that’s for sure. They’re in the $60,000 to $70,000 range now so to make it affordable for most people, they’re extending terms rather than putting money down.”
Despite the spike in lengthier loans, both Fields and John Welch, finance manager at Bill Marine in Springfield, said dealers choose shorter loans whenever possible because it means a customer is likely to come back sooner.
Typically when a customer asks for payment options, Welch said he offers options for five or six years, or leasing options to present to a customer. A longer term is suggested only when a customer ask for ways to keep the payment lower, he said.
Most of the loans the dealership offers are five or six years, Welch said.
“When you’re locally wielded, the last thing you want to do is see a customer that’s unhappy because they’ve got too long of a loan,” Welch said.
“The eighty four months, we don’t do that many of them,” Welch said. “I don’t want to say it’s the wrong way but we’ve got a conscience and we don’t want to string somebody out any longer than they have to be.”
Since about two thousand twelve Jeff Wyler has instead placed more emphasis on leasing, which typically offers lower monthly payments and permits customers to walk away at the end of the agreement or switch to another vehicle, General Manager Jay Lawrence said.
Customers can also buy the leased car at a predetermined price if they’re pleased with the vehicle. Jeff Wyler now leases inbetween thirty five and forty percent of its fresh cars.
“It keeps the payment a lot lower and you get into a fresh car every three years versus coming back in three years and finding out your car is worth less money than what you owe on it,” Lawrence said. “What you have to do at that point is you roll that money onto your fresh loan so you get even further in negative equity. Car dealers like people coming back every three years to buy cars.”
A report this month by Edmunds showcased leasing emerges to be leveling off this year for the very first time after four years of sustained growth. Leasing made up thirty one percent retail new-vehicle sales in the very first half of this year, down just slightly from a record high of 31.9 percent last year.
While most customers want expensive cars with more features, dealers also want to figure out ways to make their customers blessed.
“The dealers want to sell cars,” Lawrence said. “They’ll spread it out to make it work for the consumer. If you want to buy a car, I want to do everything I can to get you to buy that car.”
Despite reluctance from many lenders to suggest the longest loans, Fields said it’s unlikely request for longer terms will level off any time soon.
“As long as these prices keep enhancing quicker than people’s wages, the extended terms are going to be a little more prevalent,” Fields said.
Albeit consumers are spreading into longer loans, experts said there doesn’t show up to be much reason for concern yet for the overall economy like how the housing market collapse lead to the Fine Recession.
Albeit delinquency rates crept up slightly inbetween two thousand fifteen and 2016, lenders show up to have shifted more loans to customers with better credit to compensate, according to information from Experian. Lending to customers with the sub-prime and lower credit scores fell about 1.Two percent over that period, while lending to customers with the best credit scores ticked up about the same amount.
And the S&P/Experian Auto Loan Default Index, which tracks default rates across auto loans, actually displayed defaults at a harshly seven-year low, said Charlie Chesbrough, a senior analyst with Cox Automotive.
“I don’t think at this point there’s anything to suggest the outstanding auto loans that we have now are indeed under any threat,” Chesbrough said. “As long as the economy is growing and creating jobs, we may see the default rate budge around a little bit. But without any kind of underlying economic slowdown, I wouldn’t expect to see that default rate make any significant budge.”
Fields, of Coughlin, noted the extended terms aren’t available to every customer.
“The banks that do suggest those, you can’t come in with a lower credit score and get eighty four months,” Fields said. “They just don’t suggest that for the sub-prime customers.”
One danger of steadily rising loans however, is it keeps customers out of the car market for years, Chesbrough said.
“In some ways the market is kind of stealing from future buyers to sell to them today and tying them up for a very long time,” Chesbrough said. “That might come back to haunt the industry in the next duo years, but I don’t think it’s any kind of a contributing factor to see any kind of a significant decline like we eyed in 2009.”
The Springfield News-Sun provides extensive coverage of the auto industry and its influence on Clark and Champaign counties. The News-Sun has covered investments by local auto parts suppliers, Ohio’s attempt to draw investment to fresh auto technologies and autonomous vehicles and stories on Honda’s influence on local employment.
$24,780 — Average fresh vehicle loan amount 1st Quarter 2008
$30,516 — Average fresh vehicle loan amount 1st Quarter 2017
64 months — Average fresh vehicle loan term 1st Quarter 2008
68 months — Average fresh vehicle loan term 1st Quarter 2017
Buyers spread out car loans to record lengths to lower payments
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Weather and Traffic
Buyers spread out car loans to record lengths to lower monthly bills
Clark County lenders, dealers say customers looking for lower monthly payments.
Posted: 6:00 a.m. Monday, July 24, 2017
The length of loans for fresh vehicles hit an all-time high last month, as buyers took on more debt and spread their budgets for increasingly expensive cars and trucks.
The average length of an auto loan hit a record of Sixty-nine.Three months in June, according to research from Edmunds.com, up almost seven percent compared to five years ago. And Clark County lenders said it’s no longer uncommon to see loans open up into seven years or longer as buyers look for ways to keep monthly payments in check.
Five years ago, the average length was 64.9 months, said Jessica Caldwell, Edmunds executive director of industry analysis.
While not a concern by itself, analysts and Clark County lenders said longer loans often carry significant risks for buyers who could end up saddled with debt. Or in some cases, they could end up stuck in a loan that costs more than the vehicle is worth.
“If someone’s going to buy a fresh car and drive it until the wheels fall off, it’s fine as long as they get a low interest rate,” Caldwell said. “However, that’s not what people do. They buy these cars and they want to get a fresh car in five years before the loan gets paid off and they can get into a situation where they have negative equity on their loan, which puts them in a worse situation for their next purchase. They owe more than its worth and they’re rolling that negative equity into their next loan.”
The longer loans are being driven by a number of factors, including stagnant wages and higher prices for fresh vehicles, which now cost an average of $34,400, according to information from Kelly Blue Book. Much of it’s also driven by consumers themselves, who increasingly opt for more expensive sport utility vehicles and cars with the latest technology, said Michelle Krebs, an analyst for Autotrader.
The average loan amount for a fresh vehicle was $30,516 in the very first quarter of this year, according to Experian, which tracks auto loan data. That’s up about two percent compared to last year and twenty three percent compared to 2008, when the average loan was $24,780.
“We have been watching the loan terms grow for the last several years,” Krebs said. “On the plus side, it’s a way to keep the monthly payments down. On the negative side however, a consumer is in a negative position for a long time if they want to get out of that vehicle or trade. What we do know is the longer they’re in, the more dissatisfied they get with the vehicle and the brand.”
Christina Walters of Springfield is almost done paying off a seven-year loan on a two thousand nine Honda Accord she purchased from the Jeff Wyler Springfield Auto Mall. The lengthy loan made the payments fit her budget, despite rolling over a few thousand in debt from her last car into the fresh purchase, she said.
At the time, she said she was mostly worried with keeping the monthly payment low. But her car now has about 100,000 miles, despite often working from home. If she’d bought a less reliable car or faced a major financial setback, she said she lightly could have been under water on the loan.
The car’s almost paid off now but she said the lengthy loan and negative equity was a mistake she won’t make again.
“Ultimately it’s my responsibility to say no, I don’t want to do that,” Walters said. “But I kind of thought that was the only way I could do it with $Trio,000 in negative equity. I certainly don’t recommend it to anyone. I’m fortunate that my car’s still in superb form but you’ve got to take into consideration I don’t drive it much.”
The monthly payment is the priority for most car buyers, even if in the long run that means being stuck in a longer loan or paying more in interest, Caldwell said.
“A lot of times now people want to buy a larger crossover or truck that’s more expensive,” Caldwell said. “But we’re also a monthly payment culture so you’re not necessarily thinking to yourself of the total of everything you’re going to pay. A lot of folks are thinking, ‘I want those bells and whistles, and if I just extend my payment from sixty months to sixty five months it’s not such a big deal.’”
Walters said she plans to keep her Accord for several more years but it’s still tempting sometimes to look at trading it in for a newer model. At seven years old, the car doesn’t have many of the features included in more latest models. But paying off the loan will leave a few hundred more dollars in her pocket each month.
“My daughter will have this,” Walters joked. “She’s seven now and she will have this car when she turns 16. I will never get rid of it.”
Clark and Champaign County lenders have made longer car loans but said they’re reluctant to suggest some of the longest terms, some of which can last seven years or longer.
John Brown, president of Security National Bank in Springfield, said in general the bank will suggest loans of up to six years. . There’s some justification for permitting longer loans, he said, because albeit they’re more expensive, fresh vehicles also tend to last longer than they did in the past.
But the longer the loan, the greater the likelihood of the customer being stuck in a situation where they owe more than the vehicle is worth.
“We think in that six-year range for newer cars is as far as we want to go,” Brown said.
In Urbana, Perpetual Federal Savings Bank concentrates more on real estate lending than auto loans because dealerships often suggest lower interest rates through the manufacturer, said Mike Melvin, Perpetual president. With rising vehicle costs, the monthly payment to buy a fresh car or SUV is often too high for the average customer when spread over thirty six or forty eight months, he said. So he said manufacturers had to suggest longer financing terms to sell the vehicles.
The problem, Melvin said, is vehicles depreciate quickly so it’s effortless to get underwater when drivers go to trade them in.
“When you get into seventy two to eighty four months, as a lender you embark to get worried about what the value of the car will be at the time of the trade-in or the sale,” Melvin said. “Especially if the car dealer is able to roll that balance into a fresh car loan, you’re going to have the same problem but compounded and shoved down the road. You’re just sort of kicking the can down the road and sooner or later a day of reckoning has to come.”
A two thousand seventeen report by Experian displayed the percent of consumers opting for loans with terms of seventy three to eighty four months for a fresh vehicle crept up from twenty nine percent at the end of two thousand fifteen to thirty two percent at the end of last year. That number also rose in the used car market from 16.Four percent at the end of two thousand fifteen to Eighteen.Two percent at the end of last year.
It doesn’t make sense for banks like Perpetual to extend loans much further than they are, Melvin said.
“We spread it out from forty eight months to sixty to attempt to challenge but by the time we do that, it seems like others open up it out to eighty four months,” Melvin said. “You’re just sort of pursuing your tail and it gets to the point where you just can’t go after that market. Your exposure to risk and loss is much greater when you go longer because the value of the vehicle is depreciated.”
The request for longer loan terms is typically driven by customers and isn’t likely to slack off any time soon, said Jeremy Fields, finance manager for Coughlin Automotive in London, Ohio. He eyed a surge in loans of eighty four months within the last month, which he attributed to request for fresh vehicles with numerous features.
“I’m sure a lot of that has to do with the price of the vehicles,” Fields said. “You get into the larger SUVs or any of the thicker trucks and they’re not getting any cheaper, that’s for sure. They’re in the $60,000 to $70,000 range now so to make it affordable for most people, they’re extending terms rather than putting money down.”
Despite the spike in lengthier loans, both Fields and John Welch, finance manager at Bill Marine in Springfield, said dealers choose shorter loans whenever possible because it means a customer is likely to come back sooner.
Typically when a customer asks for payment options, Welch said he offers options for five or six years, or leasing options to present to a customer. A longer term is suggested only when a customer ask for ways to keep the payment lower, he said.
Most of the loans the dealership offers are five or six years, Welch said.
“When you’re locally wielded, the last thing you want to do is see a customer that’s unhappy because they’ve got too long of a loan,” Welch said.
“The eighty four months, we don’t do that many of them,” Welch said. “I don’t want to say it’s the wrong way but we’ve got a conscience and we don’t want to string somebody out any longer than they have to be.”
Since about two thousand twelve Jeff Wyler has instead placed more emphasis on leasing, which typically offers lower monthly payments and permits customers to walk away at the end of the agreement or switch to another vehicle, General Manager Jay Lawrence said.
Customers can also buy the leased car at a predetermined price if they’re sated with the vehicle. Jeff Wyler now leases inbetween thirty five and forty percent of its fresh cars.
“It keeps the payment a lot lower and you get into a fresh car every three years versus coming back in three years and finding out your car is worth less money than what you owe on it,” Lawrence said. “What you have to do at that point is you roll that money onto your fresh loan so you get even further in negative equity. Car dealers like people coming back every three years to buy cars.”
A report this month by Edmunds showcased leasing emerges to be leveling off this year for the very first time after four years of sustained growth. Leasing made up thirty one percent retail new-vehicle sales in the very first half of this year, down just slightly from a record high of 31.9 percent last year.
While most customers want expensive cars with more features, dealers also want to figure out ways to make their customers blessed.
“The dealers want to sell cars,” Lawrence said. “They’ll spread it out to make it work for the consumer. If you want to buy a car, I want to do everything I can to get you to buy that car.”
Despite reluctance from many lenders to suggest the longest loans, Fields said it’s unlikely request for longer terms will level off any time soon.
“As long as these prices keep enhancing swifter than people’s wages, the extended terms are going to be a little more prevalent,” Fields said.
Albeit consumers are spreading into longer loans, experts said there doesn’t emerge to be much reason for concern yet for the overall economy like how the housing market collapse lead to the Excellent Recession.
Albeit delinquency rates crept up slightly inbetween two thousand fifteen and 2016, lenders show up to have shifted more loans to customers with better credit to compensate, according to information from Experian. Lending to customers with the sub-prime and lower credit scores fell about 1.Two percent over that period, while lending to customers with the best credit scores ticked up about the same amount.
And the S&P/Experian Auto Loan Default Index, which tracks default rates across auto loans, actually showcased defaults at a toughly seven-year low, said Charlie Chesbrough, a senior analyst with Cox Automotive.
“I don’t think at this point there’s anything to suggest the outstanding auto loans that we have now are indeed under any threat,” Chesbrough said. “As long as the economy is growing and creating jobs, we may see the default rate stir around a little bit. But without any kind of underlying economic slowdown, I wouldn’t expect to see that default rate make any significant budge.”
Fields, of Coughlin, noted the extended terms aren’t available to every customer.
“The banks that do suggest those, you can’t come in with a lower credit score and get eighty four months,” Fields said. “They just don’t suggest that for the sub-prime customers.”
One danger of steadily rising loans tho’, is it keeps customers out of the car market for years, Chesbrough said.
“In some ways the market is kind of stealing from future buyers to sell to them today and tying them up for a very long time,” Chesbrough said. “That might come back to haunt the industry in the next duo years, but I don’t think it’s any kind of a contributing factor to see any kind of a significant decline like we spotted in 2009.”
The Springfield News-Sun provides extensive coverage of the auto industry and its influence on Clark and Champaign counties. The News-Sun has covered investments by local auto parts suppliers, Ohio’s attempt to draw investment to fresh auto technologies and autonomous vehicles and stories on Honda’s influence on local employment.
$24,780 — Average fresh vehicle loan amount 1st Quarter 2008
$30,516 — Average fresh vehicle loan amount 1st Quarter 2017
64 months — Average fresh vehicle loan term 1st Quarter 2008
68 months — Average fresh vehicle loan term 1st Quarter 2017
