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Long-term new-car loans skyrocket

September 12, 2014
Four years ago, less than 10 percent of new-car loans carried terms of 73 to 84 months. But in the first quarter of 2014, 24.9 percent of new-car loans were for that long, Experian Automotive reports. Such lengthy terms have pulled the average new-car loan to 66 months, an all-time record.
As credit continues to open up — and, some argue, automakers try to maintain the past year’s sales growth — car loans continue to lengthen. Such loans have helped fuel new-car sales, which are up 9.2 percent through July. But some have raised a warning flag. 
John Mendel, Honda’s top U.S. sales executive, said lengthy car loans are "a very, very short-term tactic" that’s "probably pulling people out of used cars into a new car that maybe they can’t afford."
Ever-longer car loans can exacerbate the strain of keeping up with those payments, too. Experian reported in late August that one- or two-month delinquencies remain at historic lows. But they are edging up.
"More so with any other product, when it comes to car loans, consumers payment shop," said Greg McBride, Bankrate.com’s chief financial analyst. But as shoppers focus on the amount of a single monthly payment, lengthier loan terms can sweep some important details under the financial rug, including the loan interest rate and total interest paid over the life of the loan.
Most factory warranties stop covering a car’s major systems after five years, so if a customer with a longer loan needs engine work in the seventh year, he could face car payments and repair bills at the same time — a serious financial drain. 
 
 

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