Business

Working with a budget — Longer loans appealing to more but can cost both buyers, dealers

By Terry Box
The Dallas Morning News
01-06-2003

Sandee Miller of Garland, Texas, opted for a six-year loan on her new 2003 Ford Escape to cut her monthly costs. KRT Photo. DALLAS The thought of a six-year car loan made Sandee Miller of Garland, Texas, "a little nervous." But like many consumers who are trying to fit a new car or truck into a budget, she says she was attracted by the lower payments of a six-year loan one of the more recent and controversial financial tools in the auto business. "I did go with the six-year because of the monthly payment," said Miller, 39, an accounting manager at a Dallas ice-cream distributor who recently traded a 2000 Ford Windstar minivan for a 2003 Escape sport utility vehicle. "I wanted the Escape and I wanted it with all the options, or I didn’t want anything." While six-year loans might make new cars and trucks more attainable, they may prove to be a bigger problem than solution, some dealers say. Among them: Consumers, in the long term, could slide deeper into debt. And local dealers who for nearly a decade have counted on consistent sales growth in one of the nation’s strongest new-vehicle markets could see more peaks and valleys in their business as people are forced to keep their heavily financed vehicles for a longer time. According to Dealer Magazine, 21 percent of new car and truck sales are now financed by six-year loans. Five-year loans are the norm in the Dallas market, though six-year loans fund a third of the sales at some stores, dealers say. Consumers are turning to longer loans to keep their monthly payments low. "It’s all about monthly payments now," said Mark Eddins, president of Friendly Chevrolet of Dallas. "This is a monthly pay market, and customers have been lulled into always expecting low payments." Low monthly payments are commonly promoted in car advertisements, often in reference to short-term leases or low-interest financing. But manufacturers and financial institutions are slowly moving away from short-term leases, which have left them with poor residual values at the end of the lease, and consumers can’t always meet the high credit requirements for zero-percent and other low-interest loans.

That makes longer-term loans increasingly attractive. Monthly payments on six-year loans can be $50 to $80 lower than on similar five-year loans, according to industry figures. For example, on a $25,000 loan at 6.9 percent interest, monthly payments would be $493 for a five-year loan and $425 for a six-year loan. *** However, the lower payments come at a price: Most consumers will be "upside down" owing more than their cars and trucks are worth for most of the life of the loan. A majority of Dallas-area car-buyers are upside-down now, dealers say. When they purchase a new vehicle, they "stack" the unpaid debt from their old vehicles into the loan for the new car or truck. And six-year financing is readily available. Banks, credit unions and automakers’ financial divisions are offering the loans and some are even making seven-year loans on vehicles that cost $30,000 or more. Ford Motor Credit Co. began making six-year loans widely available this year, mainly to remain competitive with credit unions and banks, said Melinda Wilson, a spokeswoman for Ford Credit. The loans account for 4 percent of the company’s total volume and are extended only to customers with above-average credit, she said. *** Many dealers worry that if the trend toward long-term loans continues, it will change the fundamentals of selling cars. "It’s a bad business practice," said Sam Pack, owner of Sam Pack’s Five Star Ford of Carrollton, Five Star Ford of North Richland Hills and Ford Country of Lewisville all in Texas. "I cannot live with seven-year trade cycles." Most people in this market like to trade for a new vehicle every three or four years, Pack and other dealers said. They probably won’t be able to do that with six-year loans because even after four or five years of payments, most consumers will still owe far more than their cars are worth.