US auto sales strong, but they're costing buyers more in loans
US automakers reported their strongest May sales in almost a decade – but the time it takes for buyers to pay off auto loans is at an all-time high.
General Motors reported its total sales were up 3 percent since last year, making it GM's best May sales since 2007 and its best month since August 2008. GM's Chevrolet pickup sales jumped 30 percent to 60,483. GMC also had its best May since 2005 with sales up 12 percent.
Fiat Chrysler sales increased 4 percent year-to-year, according to the company's press release. It was Fiat Chrysler's best sales for May since 2005. Ford saw a dip in total sales, reporting a 1 percent decrease from May 2014. However, the automakers Mustang and Lincoln brands both had their best May results in eight years: Mustang sales were up 39 percent while Lincoln retail sales increased 10 percent.
As auto sales continue to grow, so do the terms on loans for these new cars. The average loan term for new and used vehicles reached an all-time high after increasing by one month to 67 months and 62 months respectively during the first three months of 2015, according to a report by research group Experian Automobile. That is more than five years of monthly payments toward owning a vehicle.
Longer loans with terms lasting 73 to 84 months – six to seven years – account for nearly 30 percent of all new vehicles financed, according to the report. It is a 18.6 percent jump from a year ago and the highest percentage on record since Experian started to publicly track the data nine years ago. Long-term loans for used vehicles also broke records, increasing by 1.8 percent to 16 percent in 2015's first quarter.
"The thing about it is that these loans, they keep growing," says Jessica Caldwell, director of industry analysis for Edmunds.com. Loan terms for cars have slowly increased over time, but the average loan length has crept up recently, she says in a phone interview.
Longer auto loan terms can be great for car buyers because they can keep monthly payments down, Michelle Krebs, a senior analyst at Autotrader, says in a phone interview with the Monitor. Car prices have gone up 4 percent to $33,363 in May, Krebs says, citing data from Kelley Blue Book. To keep up with more safety regulations and fuel economy and emissions standards, automakers need to continue to add more features, which leads to higher prices.
Financing and monthly payments for new vehicles both increased year-to-year, according to the Experian report. The average new vehicle loan ticked up from $27,612 to $28,711. Average monthly payments crept up by $14 to $488.
Meanwhile, wages remain stagnant, Krebs adds, so stretching out the terms helps keeps costs low. However, longer loan terms mean that buyers are driving that car for a long time. It is less problematic if the car buyer wants to keep that car for a long time, she says. But if consumers want something different or their lifestyles change, then they are stuck.
Will consumers start having auto loans with terms that go on for eight, nine, or even 10 years?
"I've seen 92 months for loans," Krebs says. That is almost eight years. "They are out there."
The price of cars will continue to go up in the future, she adds. Since wages are not going up, Krebs does not see these long terms going away anytime soon. On the bright side, car quality has improved so they can last longer.
Caldwell says she thought the numbers would have capped off, but it has not. In the past few years, she has seen terms increase by three months.
"I think anything is possible," Caldwell adds.
