Auto sales’ rise driven in part by riskier loans

Higher interest, lengthier terms could lead to snowballing debt

9/2/2014

WASHINGTON — U.S. automobile sales are sizzling this year in part because Americans increasingly are taking out longer and longer loans to purchase used and new vehicles.

That U.S. consumers are unleashing pent-up demand after holding off on buying new cars is good news.

But it may be a problem that many of these purchases are made with loans that stretch over long periods of time, many extending well beyond the four-year period when many Americans trade in their vehicles.

“We’re seeing a lot of subprime loans, loans that are over 10 percent interest and very long-term loans, as long as 72 months, which lowers the monthly payment,” said Michelle Krebs, the director of automotive research for AutoTrader.com.

Four-year car loans used to be the norm, which then became five-year loans.

From April through June of this year, 41 percent of new-car loans were for financing largely about six years, according to data from the credit analysis firm Experian.

About 14 percent of used-car loans were for periods between six and seven years, the Experian data shows.

“A lot of times the car dies long before they can pay off the loan, or there is an expensive repair that they can’t afford, so they trade it in,” said Rosemary Shahan, the president of the consumer advocacy group Consumers for Auto Reliability and Safety.

“The loans are disproportionate to the value of the car. The car is a depreciating asset, and it is going to be worth even less as time goes on, and that negative equity gets rolled into the next loan.”

The long-term loans could result in snowballing debt.

“It’s something we keep an eye on,” said Melinda Zabritski, the senior director of automotive finance for Experian, which shared the quarterly data with McClatchy.

“Consumers are certainly trying to keep the payments as low as possible in a market where vehicles are becoming more expensive.”

Business is booming for new-car sales, with projections of at least 16.3 million vehicles being sold this year.

Beside lower monthly payments with longer term loans, another factor in those sales is pent-up demand.

The average age of an American car or light truck on the road is 11.4 years, up from 9.8 years a decade ago.

That suggests consumers had put trade-ins on hold, insecure about their jobs. Now they’re trading in those old cars.

August’s U.S. auto sales data will be announced Wednesday.