Want to refinance your car loan? Yes, it can be done. Is your credit history sketchy--or nonexistent? No problem. Does this sound like late-night radio ads for mortgages two years ago? In fact, many of the same credit shenanigans that led to the current housing crisis are now migrating to auto loans.
Two trends are responsible, according to the "Los Angeles Times": "The length of the average automobile loan hit five years, four months in October, up more than six months from 2002." Nearly half of all car loans written today are for longer than six years. Even credit-stingy automakers such as Toyota and Ford are extending the length of their loans to seven-year financing. At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500
in just a year. It has nearly doubled in the last decade. As loan term periods extend toward the decade mark, owners are loading their vehicles with options galore (heated seats add only a dollar or two per month). Not surprisingly, car dealers are only too happy to help them.
Today, the typical car owner owes $4,221 more than the vehicle is worth.
The sky isn't falling. Read after the jump.
Not mentioned in the "Times" article is that the "average" amount owed on a car is hugely skewed by luxury makes (and utility trucks). A relatively small percentage of individuals and companies are assuming extravagant amounts of debt on auto loans for various reasons, including tax write-offs. While some people wind up with BMW-sized debt on their Honda Accords, most car owners are more rational about the loans they sign. Also, new studies show that car owners are less likely to default than home owners because the size of the debt is relatively manageable and because a car is often the only way to get to work. It's probably also true that the debtors know the Repo Man works far faster and more efficiently than the foreclosure bureaucracies at home-lending outfits.
Still, the trend is unsettling. The two largest subprime lenders for automobiles, Consumer Portfolio Services and Americeredit have seen their share prices drop by about half in the past several months. And consumer debt in general has been ringing alarm bells at the Federal Reserve and in the halls of Congress. Tightening credit for cars is the last thing the auto industry wants to see. Luxury cars are fat for profit. Extending loan terms has allowed automakers to seduce consumers into vehicles they can't afford. In 2008, the problem may come home to roost.
