Los Angeles Times
New cars that are fully loaded — with debt
Americans are rolling over loans, often ending up owing more for the
vehicle than it's worth.
By Ken Bensinger / Los Angeles Times Staff Writer
December 30, 2007
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last
year for a shiny new Ford F-350 turbo diesel with an extended cab, it
seemed like a great deal. Even though they still owed $9,500 on their
SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville, made it easy; it
just added the old debt to the price of the new truck and gave the
couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long
obligation, but they couldn't pass up a monthly payment under $700.
Now they're having regrets.
"I didn't realize how much debt was in it," said Jennifer Post, who
has since moved with her family to Iowa. Now, she'd like to get rid of
the truck but can't, because there's so much debt that she'd literally
have to pay someone to take it off her hands.
"We have no options," she said.
Americans haven't just been taking out risky mortgages for homes in
the last few years; they've also been signing larger automobile loans
for significantly longer terms than they used to.
As a result, people are slipping into a perpetual cycle of automobile
debt that experts think could lead to a new credit crunch extending
from dealerships to driveways and all the way to Wall Street.
Gone are the days of the three-year car loan. The length of the
average automobile loan hit five years, four months in October, up
more than six months from 2002, according to the Federal Reserve. And
nearly 45% of loans written today are for longer than six years. Even
some staid lenders owned by the carmakers, such as Toyota Financial
Services and Ford Credit, are offering seven-year financing. And a few
credit unions, particularly in the West, are tinkering with the
At the same time, the amount of money drivers owe on their cars is
soaring. In October, the average amount financed hit $30,738, up
$3,500 in just a year and nearly 40% in the last decade, according to
the Fed. More troubling, today's average car owner owes $4,221 more
than the vehicle is worth at the time it's sold -- up from $3,529 in
2002, according to industry analyst Edmunds.
[that's much too much! -- JD]
... It's not just individual consumers who are at financial risk.
Nationwide, an estimated $575 billion in new and used auto loans are
written every year by auto manufacturers, banks, credit unions and
other lenders. About 30% of the loans that are originated by banks,
and 100% of those issued by automaker financiers, are, like mortgages,
repackaged and sold as securities, according to the Consumer Bankers
Analysts warn that just as investors didn't comprehend the risk
inherent in some of the more exotic home mortgages in recent years,
they aren't considering how risky these car loans are. If longer loan
terms allow debt on the loans to grow too large, many drivers may
simply default, leading to expensive repossessions.
And even those who keep paying their bills may reach a point, like
Gerhardt, where they simply can't afford another car. That could send
vehicle sales down the drain, a nightmare scenario for an industry
that has already taken a hit this year from slower consumer spending
and higher gas prices.
It could also lead to serious losses among financial institutions that
have invested in car debt. Among securitized auto loans, two-thirds
have terms longer than 60 months, a fact that Standard & Poor's, which
rates auto debt for sale on the secondary market, calls a "credit
This month, S&P reviewed its ratings on $113.5 billion in auto loan
securities it rated in the last two years out of concerns over growing
losses. It didn't make any downgrades but predicted that "rising
losses will continue into 2008 across all segments of the auto loan
S&P has found that delinquencies of more than 60 days on car loans
issued this year to borrowers with the best credit are up 20% compared
to those issued last year, while delinquencies on loans issued this
year to subprime borrowers increased by 16%. Delinquency rates on car
loans are still far lower than on mortgages, but there is growing
concern in the financial services industry. Indeed, Tom Webb, chief
economist of used-auto analyst Manheim Consulting, said he expects the
tally for 2007 repossessions to be up by 10%.
Mark Pregmon, executive vice president for consumer lending at
SunTrust Bank, is among the concerned. "Any time you extend the
maturity of the loan, you take on more risk. The question is whether
there's enough assessment of that extra risk," he said. "Obviously,
it's a problem. It's a house of cards."
In the 1970s and '80s, car loans hovered between 36 and 48 months, and
drivers typically kept their cars longer than the life of the loan. A
number of factors changed that.
One key was interest rates, which fell from a high of 17.8% in the
early 1980s to lower than 5% today, according to the Federal Reserve.
Another was affordability. According to an index tracked by Comerica
Bank, cars have steadily gotten more affordable -- as compared to
median family income -- since the late 1990s.
With cheap money at hand for more-affordable cars, the temptation to
keep buying became huge. Today, according to Pregmon, financed cars
are typically turned over in 24 to 36 months.
At the same time they were extending loan maturities, lenders,
competing with one another, began offering more money and requiring
smaller down payments.
Today, most lenders offer financing on 100% or even 125% of the
sticker price, and some offer the most credit-worthy buyers loans for
twice the value of the vehicle they're purchasing. Last year, the
average amount financed for new cars reached 99%, according to the
Consumer Bankers Assn., up from 95% in 2005.
Lenders are beginning to brace themselves; many have said they intend
to tighten standards and require larger down payments.
Despite warnings from S&P, the Consumer Bankers Assn., Lehman Bros.
and others, there is little sign that the automobile industry is
willing -- or, with consumers demanding low payments, even able -- to
reduce the lengths of the loans they issue.
"For banks, it's a matter of meeting consumer demand: no money down
and extend the term," said SunTrust's Pregmon. "But as a lender,
you've got a moral obligation as well. Are we putting the clients in
loans they can't afford?"
Copyright 2007 Los Angeles Times