Higher Prices Causing Jump in Number of Longer-Term Loans

More new car owners are choosing to keep payments under control by lengthening the lives of loans beyond six years. That’s a total of anywhere from 73 to 84 payments or more. Experian has reported the percentage of loans of this duration has gone up 19% in the fourth quarter compared to the past year to a total of 20.1%.

The average amount financed is now $27,430, the highest since 2008. Average monthly payments are now $471, says Experian. Lengthening the life of a loan makes the higher cost seem more bearable, but in the end, many buyers end up in debt for more than the vehicle is worth.

According to J.D. Power’s Power Information Network (PIN) found long term loans 72 months or longer as of last month totaling a record 33.1%. Loans of 84 months or longer totaled 3%. PIN also found a rise in leasing, which totaled 26.5% of new vehicle transactions last month.

These new figures illustrate just how much costs have risen. Transaction prices last month are up 2% over this time last year. This number, which is what the customer actually pays, was reported by Kelley Blue Book. Automakers have sent prices on popular models soaring. GM’s 2014 Corvette is $2,000 higher than last year’s model. Subaru has increased the price of the ’15 Forester by $1,000.

Managing editor Mike Sante of interest.com, a financial website, says that focusing buyers on the monthly payment rather than the total cost is a classic trick of the auto industry to talk buyers into a car they can’t really afford. Dealers are making money by making the lower monthly payment of a long lease or loan look so attractive that the temptation to buy a more expensive vehicle is hard to ignore.  Sante said, “They want to sell you the most expensive car or truck possible, so they come up with financing options that make it seem like you can afford more than you can.”

So what would a more manageable and fiscally responsible purchase look like? Interest.com has come up with affordable limits based on income of 25 major metro areas. For example, in Tampa, where income is lowest, the affordable price is $14,209 with a $280 monthly payment. Sante said that for any consumer, loans should last no more than 4 years, down payments should be 20%, and the total cost should equal no more than 10% of household gross income.

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