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Long auto loans hurt car sales

The Baltimore Sun

Despite a record U.S. population and more licensed drivers than ever, sales of new vehicles slipped nearly 3 percent last year to their lowest level since 1998 and are down the same amount this year.

Analysts and auto manufacturers point to several factors for the sales slide, including high gas prices, sagging home values and sluggish economic growth.

But those who study car-buying habits see another factor keeping a lid on car sales: the aggressive borrowing habits of consumers today.

They say borrowers have stretched out their car loans over such a long period of time that some can no longer afford to replace their vehicle.

"They would like to trade, but they can't. They have no equity," said Arthur M. Spinella, president of CNW Marketing Research, which studies consumer buying trends.

Three out of five new-vehicle loans made this year, or 60 percent, are for 61 months or longer, and nearly 20 percent are for longer than six years, according to a Consumer Bankers Association study. Some go as long as 96 months.

That's a sharp increase since 2000, when just 21 percent of loans were for longer than five years. A longer loan takes more time to build equity usable for the down payment on the next vehicle, thus causing some buyers to delay a purchase.

"The one thing everyone in the industry should be keeping an eye on is the longer terms. It creates the potential for slower vehicle sales in the future," said Walter Cunningham, president of BenchMark Consulting International, an Atlanta financial services adviser.

"Customers who would have bought a new car sooner may not be able to. It's becoming a factor now and will become more of one in the future. Longer terms mean people aren't going to buy new cars as often," Cunningham said.

Lenders and automakers say they stretch loans because consumers want to keep their monthly payments affordable.

CNW says the average loan in 2006 was 64.8 months, up from 52.4 in 1998. This year it has climbed to nearly 71 months.

On average, it takes 48 months before a buyer has equity in a 60-month loan and 59 months on a 72-month loan, Spinella said.

Having no equity, or being "upside down" as it's called in the trade, doesn't deter all potential buyers. They might stretch out payments even further to keep their monthly note payment down.

Mike Buckingham, president and chief executive of Hyundai Motor Finance Co., the lending unit of Hyundai Motor America, says longer loans represent a potential threat to sales because most consumers start thinking about a new car after 37 to 42 months of ownership, regardless of how much time is left on their contract.

Hyundai's average loan is 65 months, and roughly 30 percent are for 72. Buckingham says Hyundai offers 30- and 36-month leases as alternatives to put their customers back in the market sooner.

"We're concerned about repeat buyers coming back," he said.

Ford Motor Credit Co. wrote more new-car loans than any other lender last year, more than 850,000, and the average loan was for 61 months. Spokeswoman Christine Solie said this year that one-third of its loans have been for 72 months.

As loan contracts have lengthened, so has the amount of time that consumers keep new cars. CNW says the average buyer keeps a car 59 months, up from 50 months in 2001. Most buyers would still like to get a new car every four years or sooner, Spinella said, but now fewer can afford to.

"There has been a two-decade trend to longer maturities. As an industry we have to deal with customers who have an upside-down situation. The bigger issue is that we're dealing with economic conditions that are less than ideal," said Paul Ballew, chief market analyst for General Motors. "Once the housing correction is behind us and if there is less volatility in oil prices, it should improve."

Analysts are looking at the impact of long loans on sales because they've noticed the long-term decline. In 1990, when the U.S. population was 231 million, vehicle manufacturers sold 13.9 million vehicles, or 6 percent of the population. Last year, when the population hit 300 million and the number of licensed drivers topped 200 million, industry sales of 16.6 million vehicles equaled 5.53 percent of Americans.

If 6 percent of the people had purchased cars last year, the industry would have sold a record 18 million vehicles. "With the population growth the industry should be doing over 17 million almost as normal," said Spinella.

Rick Popely writes for the Chicago Tribune.

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