Will Car Loans Be The Next Credit Meltdown?

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)