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Stretching car-loan terms may be risky says consultant
NEW YORK (2/14/08)--Some auto lenders are pushing longer-term car loans because they have less access to cheap-interest funds and can't cut monthly loan payments as deeply. That can be risky for the buyer and the lender, say several industry experts. About 82% of auto loans are for 60 months to 77.9 months. However, some go as long as 84 months, 96 months and nearly 102 months, according to data from Power Information Network, a unit of J.D. Power and Associates (USA TODAY Feb. 13). Toyota Motor Credit said last week it has been making 84-month (seven year)loans since August to ease buyers' monthly payments and to boost sales. GMAC offers 84-month loans, and Ford Motor Credit offers them in test marketing situations. But Argus Research auto analyst Kevin Tynan says easy buying and long loans can induce a bubble that will burst, much like the housing market did. Credit unions, seeing competition from auto dealers who offer lower month payments by stretching the number of those payments, may be tempted to follow their lead to stay competitive. However, there are other reasons to be cautious about extending loan payments, says Tynan:
* Longer loans mean the buyer plans to keep the vehicle a long time or is looking for a low monthly payment. That hurts future sales and financing opportunities. A decline in new car demand hurts the economy. * Vehicles depreciate fast. At a little over halfway into a 60-month loan, a vehicle might be worth little more than the loan balance. A longer loan means the buyer owes a lot more than the car is worth. * If the borrower decides to trade in, he still owes the balance on the original vehicle. The balance gets rolled into a new loan, making it almost impossible to have equity in a new vehicle.
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