Car Loans

By way of Tanta at Calculated Risk, this story in the Chicago Trib:

John Guido, dealer principal of Arlington Heights Ford, thinks his sales have suffered from a combination of rising car prices and longer loans, leaving fewer buyers in a position to trade for a new vehicle when the new-car itch typically appears after a few years.

“They used to be able to trade after three years. Now it’s four years,” Guido said. “If they owe $16,000 on a car that’s worth $12,000, they can’t get to a payment they’re comfortable with. That could mean a $100 swing” in their monthly payment.

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Despite a record U.S. population and more licensed drivers than ever, sales of new vehicles slipped nearly 3 percent last year to their lowest level since 1998 and are down the same amount this year.

Analysts and auto manufacturers cite several factors for the sales slide, including high gas prices, sagging home values and sluggish economic growth.

But those who study car-buying habits see another factor keeping a lid on car sales: the aggressive borrowing habits of consumers today.

They say borrowers have stretched out their car loans over such a long period of time that some can no longer afford to replace their vehicle.

“They would like to trade, but they can’t. They have no equity,” said Art Spinella, president of CNW Marketing Research, which studies consumer buying trends.

Three out of five new-vehicle loans made this year, or 60 percent, are for 61 months or longer, and nearly 20 percent are for longer than six years, according to a Consumer Bankers Association study. Some go as long as 96 months.

That’s a dramatic increase since 2000, when just 21 percent of loans were for longer than five years. A longer loan takes more time to build equity usable for the down payment on the next vehicle, thus causing some buyers to delay a purchase.