Absurd Car Loans: Are We on the Edge of Another Bubble?

[MrH]

http://www.thetruthaboutcars.com/2013/04/car-loans-the-borrow-time-gets-longer-and-longer/

When Lee Iacocca was a Ford regional manager, he helped pioneer auto loans. Consumers could buy a 1956 Ford for 20% down and $56 a month. The loans were paid off in just 36 months. In the final quarter of 2012, the average term of a new car note stretched out to 65 months, says Experian. 17% of all new car loans in the past quarter were between 73 and 84 months. A few were as long as 97 months. This trend bears huge risks for consumers and industry, says the Wall Street Journal.

The average price of a new car is now $31,000, up $3,000 in the past four years. To keep payments under $500 as month, loan terms get longer and longer. Says the Journal:

"Such long term loans can present consumers and lenders with heightened risk. With a six- or seven-year loan, it takes car-buyers longer to reach the point where they owe less on the car than it is worth. Having "negative equity" or being "upside down" in a car makes it harder to trade or sell the vehicle if the owner can't make payments.

Car makers have mixed feelings about long-term loans. They allow consumers to buy more expensive—and profitable—cars. But long loans may keep some people from replacing their cars, cutting into future sales."



Holy.  Shit.  I had no idea the average car loan is so lengthy now.  I knew 72 month loans existed, but weren't all that common.  I figured 60 months was still pretty typical.  The average is now 65 months!  And some loans go on as long as 97 months?

What are your thoughts?  Are we at a huge risk if the economy dips again, with people defaulting on car loans?  A huge flux of repossessed cars?  Will this drive the used car market down so low that new car sales suffer dramatically?

[GoCougs]

I say let people borrow themselves into a pit; just means those of us that don't will be that much better off.

[mzziaz]

Crazy.

People just buy too expensive cars. My neighborhood is getting pretty ridiculous. Ordinary Joe Schmoes buying new or newish cars every other year.

A lot of Norwegians will fall hard when the housing bubble bursts.

[SVT666]

Cars are getting way too expensive as well.  Mainstream midsizers that aren't even loaded are $30K now, but if you need more than 60 months and you can't even make a downpayment, then you shouldn't be buying that car to begin with. Over 96 months you are upside down for almost then entire duration of the loan.

Personally, I always put down enough that I will owe less than it's worth from Day 1 of the loan.

[MrH]

Cars are getting way too expensive as well.  Mainstream midsizers that aren't even loaded are $30K now, but if you need more than 60 months and you can't even make a downpayment, then you shouldn't be buying that car to begin with. Over 96 months you are upside down for almost then entire duration of the loan.

Personally, I always put down enough that I will owe less than it's worth from Day 1 of the loan.

Well, I would hope so.  That only ends up being a few grand...

[2o6]

The loan for the Yaris was 60 months.

[SVT666]

Well, I would hope so. 

Most people don't.

[MrH]

Most people don't.

Most people are stupid

" Think of how stupid the average person is, and realize half of them are stupider than that."

[Laconian]

Crazy.

People just buy too expensive cars. My neighborhood is getting pretty ridiculous. Ordinary Joe Schmoes buying new or newish cars every other year.

A lot of Norwegians will fall hard when the housing bubble bursts.

There's a housing bubble in Norway? Plz elaborate

[mzziaz]

There's a housing bubble in Norway? Plz elaborate

I bought a pretty average house a little over a year ago. It's a bit bigger than most, but is built in `87 and nothing special. Countryside. Price = about half a million US$.

[Catman]

Its nutz.

My wife and I can afford more than we will probably buy.  I agree with Craig.  I think the prices are getting higher as the loans get longer.

[Laconian]

I don't think a bubble bursting here would have nearly the same impact as homes.

People made financial decisions under the assumption that their homes would appreciate, and the degree to which they overextended themselves was massive. Overextending yourself with a car means a correction on the order of a few thousand dollars. With homes, it's hundreds of thousands.

[veeman]

The loaded mainstreamers of today have all the features and niceties of what was once only the domain of luxury brands.  Used certified cars will become very popular.

[MX793]

The loaded mainstreamers of today have all the features and niceties of what was once only the domain of luxury brands.  Used certified cars will become very popular.

Until there is a shortage because fewer people buy new cars.

[Lebowski]

Stupid but IMO doesn't mean we are in a bubble ... I just think a lot of people will find themselves having to work til the day they die due to the lifestyle choices they have made.

[Lebowski]

Wrt price I don't think it's really outpacing inflation taking into account the added content of newer cars, I just think people choose to drive nicer cars than they can afford and replace them more often than they can afford to. Such is the result of a society that has been taught to think about the cost of everything in terms of "what will it cost per month?" 

[Cookie Monster]

Wait, so I could buy a car now and not finish paying it off till I'm 30?

[Madman]

Cars are getting way too expensive as well.  Mainstream midsizers that aren't even loaded are $30K now, but if you need more than 60 months and you can't even make a downpayment, then you shouldn't be buying that car to begin with. Over 96 months you are upside down for almost then entire duration of the loan.

Based on my personal observation, it seems to me most people buy cars that are at least one size too big (and too expensive) for their real needs.

A prime example of this is someone with whom I work.  She's a middle aged single lady who rarely carries anything larger than one of those overpriced handbags which most women inexplicably go ga-ga over.  After years (seriously, YEARS!) of talking about it and dithering over which car to buy, she finally replaced her ageing but still serviceable 1999 Saturn SC.

She eventually chose a 2013 Ford Focus sedan with the base 2.0 litre engine and (what else?) the female-obligatory automatic transmission.  Recognising my fully paid-up Car Geek credentials, she asked me about various cars and I suggested something small and sensible in the Fiesta-Fit-Yaris-Mazda2-Sonic mould.  Yet, in the beginning, she was looking at cars two sizes (and thousands of dollars) further up the totem pole; Camry-Accord-Fusion-Altima-Malibu sized offerings.  I guess it is something of a small victory that she decided to meet in the middle and go with the Focus, even if it is still too big for her needs.  Then again, the once "compact" Focus really isn't so compact anymore.  It's as big as a mid-sizer from fifteen years ago!

Indeed, I'm positive most Camry buyers these days would be better served by a Corolla but gravitate to the Camry name out of force of habit.  Like the Focus, the Corolla is no longer a "compact" car by any stretch of the imagination.  The same can be said of all its rivals, too.  Why not get a car with 90 per cent of the room plus better mileage for thousands less?  Who needs a $30,000 tank of a Camry?  Nobody whom I'm aware of, that's for sure!  Likewise, most Focus/Corolla buyers (like my co-worker) really should be buying a Fiesta/Yaris.

Maybe if the average consumer were more realistic about their needs there wouldn't be any demand for 72 or 84 month car loans?

Okay, I'll get off my soapbox now.

[SVT666]

The new Focus is virtually the exact same size as my SVT Focus was and it was a first gen...and by no means is the Focus too big for a single person. 

[Laconian]

Most people don't even qualify for 2-passenger HOVs. So most people should be getting Chevrolet Sparks instead?



Going up a size in the passenger car class is totally reasonable IMO. There are many desirable qualities other than space that come when you spend a little more on a car - seat comfort, refinement, power.

Of course there is an inflection point to this, when people buy WAY too much (usually SUVs) and all the extra size becomes a big liability. But going from a compact to a midsize? Almost no downsides beside sticker price.

[Madman]

Most people don't even qualify for 2-passenger HOVs. So most people should be getting Chevrolet Sparks instead?



Going up a size in the passenger car class is totally reasonable IMO. There are many desirable qualities other than space that come when you spend a little more on a car - seat comfort, refinement, power.

Of course there is an inflection point to this, when people buy WAY too much (usually SUVs) and all the extra size becomes a big liability. But going from a compact to a midsize? Almost no downsides beside sticker price.

Don't even get me started about idiots who buy gigantic SUVs then bitch about how much gas it guzzles and how difficult it is to park!

But, when it comes to normal cars, is the size factor really that big of a deal?  Is a Focus really that much more comfortable than a Fiesta?  I don't think so.  And since sticker price is a big factor in determining a monthly car payment (and whether a buyer needs to finance for 36,48.60 or even 72 months) going one size down can be a big financial advantage.

For example......

2013 Ford Focus SE sedan base MSRP: $18,200.

2013 Ford Fiesta SE sedan base MSRP: $15,200.

$3,000 is a huge savings and can potentially mean either lower payments or a shorter loan term.  And what do you sacrifice by choosing the Fiesta instead of the Focus?  Not much, as far as I can see.  For a single person looking for what is basically just a commuter car (like my co-worker) a Fiesta simply makes more sense.

[Madman]

The new Focus is virtually the exact same size as my SVT Focus was and it was a first gen.

This is true.  The MK I Focus was a revolutionary car in that it was one of the biggest (if not THE biggest?) car in its class.  Compared to the Escort it replaced, the Focus was practically a limo!  This is when everything began to shift up a size.

Let's continue using Ford as an example (although everyone else has done this, too) to see how "Model Bloat" has affected the market.

Compare Ford's model range from the 1990s (small to big) versus today......

1990s: Aspire, Escort, Contour, Taurus.

Today: Fiesta, Focus, Fusion, Taurus.

Notice anything?  Today's Fiesta has as much room as a 1990s Escort.  Today's Focus has the space of a 1990s Contour and today's Fusion is as roomy as a 1990s Taurus.  See what I mean by everything shifting up a size?  Instead of buying a new Taurus, for example, an old Taurus owner can get into a Fusion (the modern-day Contour) and not feel like they were stepping down to a smaller car.

This is why I think we need to redefine the size categories.  A Taurus was once considered "mid-sized" but it isn't, anymore.  It's freakin' HUGE!  So is a Fusion, for that matter.  In reality, the Focus is truly a mid-sized car by modern standards.  But many shoppers still consider it a "compact" and won't even consider looking at one to see how spacious it really is.

[2o6]

The Sonic beats the brakes off the Spark in comfort in pretty much every conceivable way. Cruze is still more comfortable than the Sonic, and the Malibu tops all of them.

[AutobahnSHO]

I saw this article and was thinking the same thing about buying too expensive cars-

The lady in the article is paying $480/month for years and years!!!
-just 4-5 payments could pay for a new engine in her existing car. Installed.
-just 4-5 payments could get her a new transmission for her existing car. Installed.

But the problem with people who buy new every few years is they roll a lot of debt into the new debt- further extending themselves. She probably will get another car in 2-4 years and roll the remaining loan into a new loan, for 1020 months....! 


Someday I would LOVE to be able to afford a new car- but I would probably buy used.
OR if I bought new, I would buy it and run it into the ground... Or at least keep it until it's 100% paid off.

[AutobahnSHO]

BTW,
$480/month for 75months = $36k on a car worth $23k. 

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[MrH]

for Madman telling people what they need.  People buy what they want, and don't really care about your evaluation of their "needs".

BTW,
$480/month for 75months = $36k on a car worth $23k. 

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Comes out to a little over 7%.  Whoever is paying 7% interest on a car loan these days is an absolute sucker.

[SVT666]

Don't even get me started about idiots who buy gigantic SUVs then bitch about how much gas it guzzles and how difficult it is to park!

I never hear SUV owners complain about that stuff.

Is a Focus really that much more comfortable than a Fiesta?  I don't think so. 

Yes, and quite noticeably.  The same goes for Focus vs Fusion.  Fusion is noticeably more comfortable than the Focus.

[2o6]

Coming out of an older car, I would agree that a modern subcompact or even a city car would blow your mind, maybe. When I had my neon, when I test drove a new Yaris Hatch, the Yaris felt like a tank by comparison.

[GoCougs]

Based on my personal observation, it seems to me most people buy cars that are at least one size too big (and too expensive) for their real needs.

A prime example of this is someone with whom I work.  She's a middle aged single lady who rarely carries anything larger than one of those overpriced handbags which most women inexplicably go ga-ga over.  After years (seriously, YEARS!) of talking about it and dithering over which car to buy, she finally replaced her ageing but still serviceable 1999 Saturn SC.

She eventually chose a 2013 Ford Focus sedan with the base 2.0 litre engine and (what else?) the female-obligatory automatic transmission.  Recognising my fully paid-up Car Geek credentials, she asked me about various cars and I suggested something small and sensible in the Fiesta-Fit-Yaris-Mazda2-Sonic mould.  Yet, in the beginning, she was looking at cars two sizes (and thousands of dollars) further up the totem pole; Camry-Accord-Fusion-Altima-Malibu sized offerings.  I guess it is something of a small victory that she decided to meet in the middle and go with the Focus, even if it is still too big for her needs.  Then again, the once "compact" Focus really isn't so compact anymore.  It's as big as a mid-sizer from fifteen years ago!

Indeed, I'm positive most Camry buyers these days would be better served by a Corolla but gravitate to the Camry name out of force of habit.  Like the Focus, the Corolla is no longer a "compact" car by any stretch of the imagination.  The same can be said of all its rivals, too.  Why not get a car with 90 per cent of the room plus better mileage for thousands less?  Who needs a $30,000 tank of a Camry?  Nobody whom I'm aware of, that's for sure!  Likewise, most Focus/Corolla buyers (like my co-worker) really should be buying a Fiesta/Yaris.

Maybe if the average consumer were more realistic about their needs there wouldn't be any demand for 72 or 84 month car loans?

Okay, I'll get off my soapbox now.

The hitch in your premise is the Camcord is for her (and most people) simply a better car than a Focus or a compact in general. First, when comparatively equipped a Camcord is but only 10-15% more cost; this minor bump in costs gets at least 30% more car - more room, more refinement, more safety. Second, a Camcord's ~5-10% less MPG is more than offset in the superior resale value vs. a Focus.

Congrats, you steered her wrong .

[2o6]

The hitch in your premise is the Camcord is for her (and most people) simply a better car than a Focus or a compact in general. First, when comparatively equipped a Camcord is but only 10-15% more cost; this minor bump in costs gets at least 30% more car - more room, more refinement, more safety. Second, a Camcord's ~5-10% less MPG is more than offset in the superior resale value vs. a Focus.

Congrats, you steered her wrong .

I prefer the smaller car, but yes, Midsizers are a very strong value.