The LA Times has an article about car loans that caused our jaw to drop. As someone who bought both the cars she has owned with cash, (from friendly human beings who had cars but didn’t want them anymore), the staggering amount of debt that people are willing to sign up for just to drive a slightly newer car made us feel sort of ill.
Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today’s average car owner owes $4,221 more than the vehicle is worth at the time it’s sold — up from $3,529 in 2002, according to industry analyst Edmunds.
The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.
Meet Cindy, a compulsive car purchaser:
Cindy Gerhardt has rolled over so much debt on successive vehicle purchases — five in three years — that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.
Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle — and increase her debt by another $25,000.
“It’s our own fault that we traded in vehicles so many times, but we never thought it would get to this,” said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. “Not one dealer ever said this was a problem. Ever. I never had a dealership say no.”
Yes. This will end well. The article goes on to note that delinquencies on car loans issued this year are up 20%.
New cars that are fully loaded — with debt [LA Times](Thanks, Arthur!)
(Photo:Ken Hurst/Associated Press)
More From Consumerist
-
Report: Average $951 Car-Title Loan Results In $2,142 In Interest
-
How Much More Expensive Is It To Have A Bad Credit Score?
-
Mortgages Slightly Easier To Get For Prime Borrowers, Still Tough For Subprime Applicants
-
Professor Tries, Fails To Defend Payday Lending As Legitimate Form Of Credit
-
The CFPB Answers Your Student Loan Questions, Part 3: Defaulting And Loan Forgiveness
Leasing only makes sense if you have a business and can write off at least 50% of those payments as business expenses.
Otherwise, you get stuck in one lease after another, as I did for years and years. Many people don’t save much money, so they don’t have a decent down payment to buy a car when the lease expires. You either jump into another lease with similar monthly payments or take on a massive monthly car payment with little to nothing down (talking about new cars here).
And many of the ads I see these days require a hefty down payment to get the $$ figure that is being advertised. They call it a “capital cost reduction” payment
Why in the world anyone make a down payment on a rental (which is what a lease is) is beyond my understanding.
I finally escaped out from under the lease trap in 2002 when I brought a new car. I paid about 25k, 5k under sticker and less than supposed dealer cost. If I remember correctly, I put down 10k and financed 15k at 4.75% for 4 years. I paid it off a little early and it was amazing how good it felt for the first time in my adult life to not have an approximately $400/month car payment hanging over my head, each and every month!
I’ll tell this to all the young people here: When you get into your 40′s and older, many of you may well look back and say damm, I REALLY wish I had not been so concerned with “status” and instead had saved some of that money I threw away on car payments. I live in an area where high end Mercedes/Lexus/BMW’s are a dime-a-dozen. Some families have 2, 3 or 4 of these. I see 18-20 year kids driving BMW 330′s and M3′s that their parents gave them or pay for. It’s not uncommon to see Ferrari’s, Lamborgini’s, Bently, etc. around here. The town I live in even has a Lamborgini dealership
Living in this area gives you a dose of reality when you realize that it is nearly impossible to “out-status” people like this with any car that a normal person could buy. Better to save and invest your money when you are young so you have a chance of owning more than just a flashy car. If I had only learned that lesson younger – sigh.
@Kaix: Student loan programs are extremely predatory in US.
However, probably next meltdown would be linked to credit cards. People that buy expensive cars they cannot afford are same people that rack up credit card debt.
@HRHKingFriday:
Don’t let a Dodge Intrepid of all things dictate your opinion of used cars.
Cindy is a moron.
I financed my car in 2001, 5 year note at 0%. My dad told me the only people who give you money for free are “your parents and Ford”.
I’m still driving my Focus, and will continue to until it dies.
@youbastid: I have. It’s not impossible. One might think the obvious: you overdrive your mileage. That’s an easy way to end up owing more than you own. But also if you don’t keep up the payments (like you might end up doing in a conventional loan) and the leasing company takes back the vehicle before its due date, they calculate what you owe just like any other loan – what the car is worth less what you’ve paid. And you’re on the hook for the difference.
@missdona: Then why did Chrysler give me 7-years, same as cash? Oh yeah, because Ford fans don’t go to Chrysler dealers.
I’ll drive my Dodge until it dies too. Your Ford dealer doesn’t have a lock on cheap financing.
Holy crap! I’m poor so I had to take out a loan, but I paid off that sucker in 20 months!
@humphrmi: That was 2001, when 0.0 financing was invented. And my dad works for Ford. I got my car for cheap.
Enjoy your Chrysler. I’m glad you’re happy with it.
I am amazed at the number of people who have notes on two cars, totaling more than their mortgage payments. And they’re usually still upside down on them. Part of the problem is that I live in a metropolitan area with long commutes and a miniscule amount of public transport, but from what I see, an awful lot of people are making extremely bad decisions about car buying.
Oh my gosh. I’m just stunned. Who in their right mind would take a car loan out for any longer than 3 years (4 max)? I know the things are expensive, and we want our toys and we want them NOW, but five-year car loans (and up) make me want to scream. What is wrong with us?
From the item:
> “It’s our own fault that we traded in vehicles so
> many times, but we never thought it would get to
> this,” said Gerhardt.
That’s too many words. They never thought, period.
The US has little or no public transportation infrastructure, and then people wonder how this mess happened. 9_9
For those who feel the “need” to have two cars at once, if you live in the right climate, try a scooter instead of a second car. Or instead of a car, period; people own too much “stuff” as it is.
Scooters are cheap enough to buy out in a year, gets far better gas mileage (most over 100 MPG), and are good enough for short jaunts where carrying large amounts of stuff isn’t necessary (e.g. going to work). If your co-workers laugh, remember to point out the fuel economy.
The Honda Cub C90 is not sold in the US, but is sold in Mexico (importing, anyone?) and gets 200 MPG. That’s not a typo.
@missdona: Uh, yeah. Nobody thought of zero percent financing before you bought your car. You stick with that belief. I guess I got you to thank for it.
@KJones: you can’t import anything less than 25 years old.
I don’t feel sorry for any of these people. Hell these people live in my town, most likely, ARMs a-poppin’, credit cards a-maxin’… As I drive around in a fully paid handmedown 11 year old car smiling all the way to the bank.
I disagree that GAP is a ripoff.
Here’s my automotive tale of woe;
I owed about $19,000 on my car as of December ’07. It was an ’05 Dodge Neon SRT-4 that I got completely RIPPED on. Classic case of the sleazy car dealer. They saw me come in, a young-looking female(I’m 27 but I look at least 10 years younger), and they decide to take me for all I’ve got. The car had only been at the dealership for a day or two, so it’s not even tagged yet & they charge me nearly full price on it, plus tacked on all sorts of warranties that I later came to find out were null & void to begin with b/c of what the previous owner did to the car. They withheld all sorts of critical info- like the warranty thing, the fact that it had NOT received a 5-point inspection(I pulled off more crap from that car, including a home-made oil catch can & enough blinky lights to embarrass a teenage ricer kid), the stabilizer chains had been removed, stuff was hooked up wrong in the engine, and the ENTIRE ENGINE had been completely replaced by the past owner. So I find out all this crap about a year later when I take it in for warranty repair work & find out my warranty is worthless. And now there’s nothing I can do about it, short of suing them, which I can’t afford to do. So now I’m stuck with a dying car that I still owe about $5000 more on than it’s actually worth. But on Dec. 13th, I got in a wreck, totaling it. My insurance is only giving me about 14 grand, and if I didn’t have GAP I’d have to pay the rest. That’s why I will always purchase GAP protection no matter what car I buy.
That said- buying cars SUCKS. I’m in the process right now & it’s excruciating. My credit is terrible thanks to a long string of exes ruining it for me, and my only saving grace is 2.5 years of on-time car payments in my name. STILL, nobody will finance me! I think though, after reading this article, that that may be a blessing in disguise. Even if I do get financed somewhere, I may just go to one of those “buy here, pay here” lots instead. I’ll be paying every 2 weeks, but I’ll get it paid off in 4 years versus 7 & there won’t be thousands of dollars of interest tacked onto the price of the car.
Buying cars should NOT be such a ripoff.
@humphrmi: You’re quite welcome.
B and Schwartz: Don’t overlook the Subaru performance cars. They’ll fly… and they’re AWD.
KSchwartz: written like a single city dweller with no children.
“I personally don;t see why people would roll over an auto loan.”
Because it gets them the new car, gets rid of the old car, keeps the payment down, and they don’t see the bad side.
“Leasing only makes sense if you have a business and can write off at least 50% of those payments as business expenses.”
I agree, though I’d add that if you are absolutely positively 100% one of those people that no matter what is going to get a new car every 2 years, then you might as well lease.
As far as new cars go — a new car isn’t financial suicide at all if and only if you KEEP IT. Buy a new car, drive it for at least 8 years, but preferably until its cost-prohibitive to maintain. I bought new during the 0% interest craze, financed the full ride, and paid it off last year (4 year loan paid early). I was never upside down on the car and take good care of it, so it takes care of me.
Yes, I’d LOVE a new car. That G35x looks awesome with 300+ hp, or perhaps a 2 y/o A4, but i’ll have to wait.
I’ve never purchased a new car and probably never will. If you’re willing to put in the time and effort there is a whole world of interesting used cars that hold up well from a design and mechanical standpoint and retain some value. I don’t understand people who need new cars every few years, don’t take care of their cars (after spending so much!), and use the word “investment” when talking about it. Crazy! We are a nation of big debt and monthly payments. I learned money management by working commission jobs – and paying cash for the things I want. No monthly payments here for anything – and no stress!
My two cars:
1998 Honda Civic, (daily driver, paid cash – used, 78k miles. It does the job and if it’s stolen or hit, I don’t care.
1983 Porsche 911SC, paid cash for this 12 years ago and now it’s “vintage” status so the insurance is really cheap. The market value at around $18k is the same as I paid for it and I’ve kept it in perfect shape. Porsche design holds up extremely well. People always comment on it… Oh, and the best part, it’s still quick, definitely sporty and really fun to drive (especially since there’s no payments!).
@mantari: I did that but paid it off in one year and four months. I hated that loan. Chase, never again.
@MrEvil: I bought a Subaru, New in 2003. Think about it. New, not some problem that someone sold to get out from under, or worse a pre-abused car. 62,000 miles of very trouble-free driving. I’m keeping it another five years at least.
@kwsdurango: I agree, the “investment” concept is ridiculous. It’s a car, a mode of transportation; and unless if the car is rare, being wiped with a diaper, and not being driven, it’s not an investment.
@kwsdurango: Not everyone is car savvy, so a new car is ”assurance” that’s there is no major flaws.
@officeboy: I can tell you that the CPI is based on a survey conducted by the Bureau of Labor Statistics known as the Consumer Expenditures survey. [www.bls.gov]
I would say that if people aren’t answering this survey honestly and lowballing the prices, they’re putting the screws to themselves and the rest of us.
One of my aunts rolls her loans over every three years. She also has about $20K in credit card debt. I have no idea how she sleeps at night.
Also, I wish I’d read this thread earlier. I just bought a Tiburon (which I LOVE), but now I’m sure that even with my wheeling and dealing, I probably still got screwed.
Here’s a quick story for you. In 2005, I purchased a brand new 2006 Vette (not the Z06 model) for $63,000 w/ 0 down, 100% financing @ 10.5%.
Since I couldn’t afford it, I did the same thing this lady did, and like an idiot, I traded it in–upside down already–for a new (9k mi, used as demo model) Tahoe, fully loaded for the same terms @ $53,000.
Prior to this, I also purchased a used 2002 Yukon (88k mi) for $20k @ 10% w/ 0 down/100% financing. I ended up not being able to keep any of them.
Long story short, I did a volunteer repo on the $53k Tahoe and the $20k Yukon. They were auctioned by the bank.
And, here is the interesting part: what they sold for at dealer auction. The $53k Tahoe sold for $13,500 (yes, that right), and the $20k Yukon fetched a whopping $7,500.
I’m no longer in debt, and have found a couple guys that can get me into the big Mannheim dealer auction lot every week here in Atlanta. The savings are tremendous–at least 8k off sticker price on new models. Never again will I ever buy from a dealer.
And, no, never again will I finance anything. I’ve learned a lot from sites like this, Dave Ramsey, and so forth. But, I must say–if one were on the other side of the coin and selling goods & services to people like her (or me, a couple years ago), imagine how much money can be made…
Just last night I saw a guy delivering pizza to our building in a late model Mercedes. I often see pizza guys driving cars nicer than mine. I have a crappy car but at least I’m not driving around delivering pizzas at 10:00 at night.
These 6-7 year loans just enable payment buyers to get more car than they can reasonably afford (and far more than what they actually NEED) but put them in the position of being upside-down until maybe the last 12 months of the loan, if they get that far.
My rule of thumb is, IF you must buy a new car or take out a loan on one, is to look at the payments on nothing more than a 48 month loan. If the payments are too high for you on that term loan, then you can’t afford the car. Period. However dealers are all too eager to do “whatever it takes” to get someone behind the wheel of a car, so loan terms have gotten progressively longer to get people into what amounts to a status symbol vehicle.
I bought a two-year-old car with a four-year loan. Paid it off about a year and a half “early”. My husband and I have sworn off car loans now. Why not just save up the money and buy a used car for cash?
“no one told me” cracks me up. How about her parents or grandparents? Is the concept of “buy what you can afford/pay for what you buy” really that unusual?
@joshkef
Once you see those auction prices you quickly realize how much of a KILLING the dealers are making off used cars. Buying less than wholesale bluebook and often asking more than retail (for negotiation padding)
The advice of buying a slightly used car or a CPO from a dealer seems ludicrous to me. You can often buy a new car for what some dealers want for a used one. The best bet is private party or buy a car that’s older and has depreciated more.
I say if you can pay cash for it go for it…otherwise, buy the clunker. I am saying this as a plot to purchase an $83,000 car.
I bought my car (slightly) used. 13K on the odometer and lots of options, but still less than a brand-new one equipped with just the basics.
I’ll have my note paid off this month (a full 3 YEARS ahead of schedule). By my calculations, the amortized interest savings to me will be about $1200.
“And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.“
Yeah, that gave me a queasy feeling. After paying ours off (WAY early), I can’t imagine staring down the barrel of 6, 7 or 8 year car loans and saying, “Yes”. Of course this industry is also heading for a meltdown. If you do stupid for long enough, eventually the cards will fall in on you. And the car loan industry has been doing stupid for a LONG time. Good riddance.
“Not one dealer ever said this was a problem. Ever. I never had a dealership say no.”
No, they won’t tell you “No”. The finance guy is a salesman, just like the salesman that talked you into another stupid new car that you can’t afford. Now the finance guy is talking you into finance terms that you can’t afford. “No” isn’t in their vocabulary. “Commission” is.
@traezer: gosh! I was waiting for the part about the salesman pressing the gun barrel into your temple while you signed the paperwork.
@anatak: Right, a Car Salesman’s job is to sell cars. If you come knocking on the door, wanting a car, it’s his job to get you what you want.
He’s not the “Keep You out of Financial Trouble Man.”
@kabuk1:
Buying cars IS such a ripoff because of people like you.
One idiot (and admit it, buying that car for that price at whatever shitty terms you got was idiotic) like you is worth probably 3 or 4 skeptical, heavily-armed-with-information shoppers like me.
If you live in someplace that is chock full of people like you, all car dealers will handle everyone as though they were like you, and will be happy to get rid of people like me.
Which is why I buy private-party. I’ve had 7 cars, and 6 have been purchased from individuals. (Granted, 5 of those cars were beaters.)
MREVIL sounds like my kind of man…..haha.
I had a 3 year car loan. That was enough 4 me. I just got laid of from the mortgage industry.After being horrified by seeing people in serious car payment debt, I have reserves to live on being a single parent and paying a mortgage too.
Yep…it is the next big fiasco. Much like mortgage lenders who took this country to its financial knees, car dealers who arrange loans routinely embrace and practice predatory lending behavior (loan arranging practices). In the credit approval process they overstate your income, and other data which banks,credit unions, and other lenders use to determine your ability to repay the loan as agreed. Further they overstate most preowned vehicle’s value to the same lenders by describing the vehicle in a “book-out” (format which states the value of the vehicle purchased, its mileage and the optional equipment)i.e., they may tell lenders the vehicle has a sunroof, or leather upholstry etc. to inflate the wholsale value to the banks. This value is a part of the equation to determine how much money a lender will approve on a retail installment contract. The effects of this “bank fraud” are obvious. If the vehicle is ever repossessed, the posibility of recovering the balance of the loan is impossible. And the taxpayer again will ultimately suffer. This arm of the auto industry needs swift federal intervention and investigation.