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Car Loans Becoming Longer, Riskier

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The sub-prime mortgage crisis may currently be the sexier story about ill-advised loans, but car and truck loans have become of increasing concern to consumers as well. Shockingly, 45% of car loans are for 6-year terms or longer, according to the Los Angeles Times.

The Times recently reported on the growing length and risk of loans financed for automobiles by banks, credit unions, and the dealers themselves. The report raises several issues that all car buyers (regardless of whether they’re looking for new or used) should be aware of.

The average length of a car loan has increased to five years and four months as of October (although a story on MSN puts the average closer to 6 years even). Dwindling are the days of the three-year loan, as consumers look to finance more expensive automobiles that they would otherwise be unable to afford. Buyers are trading off large amounts of interest for a lower monthly payment. Some credit unions are even offering car loans for as long as eight and nine years.

What happens when one of these owners goes to buy a new car? Dealers often roll the debt from their last car into the loan for their next car. If this new loan must be financed over another five, six or seven years to make it affordable, you can see how this could be a problem.

With 45% of car loans written for longer than six years, this means car buyers are increasingly attempting to finance more and more debt over longer periods of time—time during which the product they’ve bought has plummeted in value.  Today’s average car owner owes $4,221 more than the vehicle is worth by the time he or she sells it, up more than $500 from 2002.

New cars that are fully loaded—with debt (Los Angeles Times)

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