Automakers are on track for their best U.S. sales year since 2006, but the growth of long-term loans, many to buyers with dicey credit scores, and a surge of leased cars that will return to dealers by 2017, could create problems down the road.
According to a Detroit Free Press report, automakers reported selling nearly 1.3 million new cars and trucks in October, an annual pace of 16.5 million, a level not seen since the peak of last decade’s housing boom.
Yet a substantial portion of this growth is fueled by three trends, any of which will reveal just how well the industry learned the lessons of 2009.
First, the average length of a new car loan is now 67 months, the second-longest ever, according to Edmunds.com. Second, leasing once again accounts for more than 25 percent of all new vehicle transactions, the highest level since the Great Recession. Finally, auto finance companies, banks and credit unions are approving more subprime loans to people with checkered credit histories.
Here’s the risk of long-term loans. After two or three years, the resale value of the car falls below the balance of the loan. The industry phrase is “upside-down.” It limits a buyer’s options in the future.
“The longer the car loan, the longer it takes to build equity, said Gerri Detweiler, director of consumer education at Credit.com. “If you need to get rid of the car, you may find yourself having to write a check just to get rid of it. Or even worse, you may be stuck in a scenario where you roll over that balance into another new vehicle loan” possibly at a higher interest rate.
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