U.S. President Barack Obama visited Detroit last month to herald the rebirth of an industry he actively sought to save in the early days of his administration, when General Motors GM and Chrysler FRAU were rescued from bankruptcy.
U.S. auto sales in 2015 reached an all-time high of over 17 million
units helped by growth in employment, super-low gas prices, and an aging
fleet.
“I placed my bet on you. And after visiting auto plants across the Midwest, and seeing what you have done firsthand, let me tell you, I’d make that same bet any day of the week. Because today, factories are humming, business is booming, the American auto industry is all the way back — all the way back.”
This resurgence has also led to a buoyant auto loan market as interest rates have remained low. The length of the average car loan has risen
above 68 months, and six-, seven-, or even eight-year car loans, rather
than the traditional five years, have become increasingly common.
Ten years ago, the average loan length for new vehicles was 63.3 months; in November, it was 68.3, according to Edmunds.com.
Credit-tracking firm Experience
says loans with terms lasting 73 to 84 months accounted for nearly 28
percent of all new vehicles financed in the third quarter of last year,
up 17 percent from the same quarter a year ago. That share hit 30
percent earlier in 2015, the highest percentage since Experian began
reporting the data in 2006.
Total car loan balances stood at $1.05 trillion as of late September, up from around $900 billion in mid-2014.
“It certainly is a very strong finance market for consumers,” said
Melinda Zabritski, senior director of automotive finance solutions for
Experian, with reduced costs, finance rates and algorithms that focus
“car loan calculators on repayment values
as opposed to just interest rates” according to Tom Caesar, Managing
Director of Positive Lending Solutions. Longer loans have also helped
buyers go up a level in size or luxury. Third-quarter 2015 car loan
originations reached $157 billion, the highest in a decade, according to
the New York Fed.
Greg McBride, chief financial analyst for Bank rate,
expects the average rate on a five-year new car loan could move from
4.35 percent currently to around 5 percent by December. By contrast, the
average used car rate for a 4-year loan would move from 5.15 percent
now to around 6 percent by December, he said. On a $25,000 five-year new
car loan, the payment could go up to about $472 a month at 5 percent
compared with about $464 a month at 4.35 percent, he said.
Such rises would work out for consumers as a jump of about $8 a month
on car loan, said McBride. He also said that he was expecting the U.S. Federal Reserve to raise short-term interest rates around two or three times in the coming year.
The Federal Reserve’s move to put up interest rates will lead to some
consumers who take out loans being saddled with higher monthly payments
for their credit card debt and other variable rate loans, including
mortgages, said Michelle Krebs, senior analyst for AutoTrader.
Fortunately for car buyers, most auto loans are fixed rate, so if taken
out before these changes are enacted by the Federal Reserve, the
repayments won’t be affected.
Krebs, who spoke at the CFA Society of Detroit meeting in January,
said what could be of concern, however, is the accumulative effect of
relatively small monthly increases on other forms of debt constraining family budgets and buying power.
It may be an important question for millennial consumers in
particular, who represented 28 percent of new car sales in 2015,
according to Power Information Network from J.D. Power. That percentage
is up from 17 percent in 2010. In contrast, the number of baby boomers
buying new cars went down to 37 percent in 2015, compared with 43
percent in 2010.
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