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As new-car prices rise, some auto loans stretch to 97 months

April 12, 2013
Last month Nakisha Bishop took out a loan to buy a $23,000 Toyota Camry and pay off several thousand dollars still owed on her old car. The key to making it work: She has more than six years — 75 months in all — to pay it off.
“I had a new baby on the way, and I was trying to keep my monthly payment a little bit lower to help afford child care,” Ms. Bishop, a 34-year-old sheriff’s deputy in Palm Beach County, Fla., said recently. She pays $480 a month for the 2013 Camry, just $5 a month more than the note on her old car. The car won’t be paid off until her 1-month-old daughter is heading to first grade.
Ms. Bishop’s 75-month loan illustrates two important trends rippling through the U.S. auto industry. Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.
The average price of a new car now is $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465, the result of longer loan terms and lower interest rates.
In the fourth quarter of 2012, the average term of a new-car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17 percent of all new-car loans in the past quarter were between 73 and 84 months and that there even were a few as long as 97 months. Four years ago, only 11 percent of loans fell into this category.
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.