Auto lenders refuse to put the brakes on risky loans, even as subprime mortgage lenders are skidding off the road.
Mortgage lenders are spinning their wheels as more and more borrowers with weak credit are unable to make payments now that their adjustable rates have reset. This has made it difficult for the lenders to unload new mortgages on investors, bringing their businesses to a standstill.
In the case of auto lenders, rate resets aren't the problem -- the rates on most auto loans are fixed. But the terms of these loans are getting longer as consumers stretch to buy more car than they can afford. Longer terms help to lower monthly payments, offsetting the impact of rising interest rates and allowing them to put less money down.
"Most consumers still come into dealerships and tell the salespeople that they want to pay a certain amount of money per month for their car," says Jesse Toprak, executive director of industry analysis for Edmunds.com. "That is probably the single worst way to shop."
According to Edmunds.com, the average financing term for loans on new cars was over five years, or 63.8 months, at the end of August. That's up from 59.8 months five years earlier.Some loans are even longer -- as long as eight years. According to JD Power & Associates, nearly 39% of loans made year to date had original terms of between 72 and 83 months, up from 31% in 2004. And 3.9% of loans made so far this year had original terms of at least 84 months, up from 2.4% two years earlier.
To be sure, those terms are much shorter than the typical mortgage -- on average, homeowners sell or refinance, paying off their original loans every 10 years or so. But auto loans of five, six or even eight years are risky for lenders because, unlike homes, cars and trucks depreciate rapidly. Most vehicles lose about a third of their value once they are driven off the lot. So the longer borrowers stretch out payments, the more time loans spend underwater -- a term meaning the balance is bigger than the value of the vehicle securing it.