In 2015 we saw record sales of 17.5 million vehicles, thanks in part to an improving economy and by easy credit: Consumers, many with marginal credit ratings, are borrowing higher amounts and for longer loan terms than ever before. Experian, one of the three major credit bureaus, says that the average loan for a new vehicle in the third quarter was $28,936, up by more than $1,100 from a year earlier, and the average loan was for 67 months.
What’s more, consumers are trying to keep monthly payments affordable by stretching out the payments. Seventy-one percent of new-vehicle loans were for longer than five years and nearly 30 percent were longer than six years. In addition, 29 percent of new vehicle loans were issued to borrowers with credit scores below prime (660 or lower).
Potentially millions of consumers will owe more than their vehicle is worth for years and will still be making payments after the warranties run out. When they get the new-car itch again, they might have little or negative equity in the vehicle they want to trade in.Why would a consumer want to keep making payments on a car that needs repairs and has no residual value.
Loans are getting longer because car shoppers are seeing higher sticker prices on new vehicles — and more are opting for high-end models loaded with expensive features. Most people who are buying a car are trying to negotiate monthly payments. If you can’t put more money down, and you’re increasingly having higher vehicle cost, the only way to keep that payment modest is finance for a longer term. The longer the term the more interest you are ultimately paying on the loan.
The answer may be to buy a cheaper vehicle with fewer options or consider a certified used vehicle from the manufacturer as they offer warranties and usually some attractive financing rates. Check your credit first so you will know what interest rate you could get before you shop for the vehicle. Work your best price on the car first, then shop financing all of which can be done on the Internet. It may make sense to keep your current vehicle, spend some money to keep it operational for another year and shop at another time.
To read this full article in the Chicago Tribune click HERE