From Deseret News archives:
When a $38,000 car costs $44,000
Auto buyer who opts for longer loan term more likely to give more than the car's worth
Low monthly payments and no-money-down deals have long been used to shore up car sales in a slumping market. But auto buyers who opt for longer loan terms are more likely to wind up owing more on their car loans than their cars are worth. Car dealers and banks say people in this position have negative equity, but the popular expression is that they are "upside down." Last year, about 29 percent of car buyers who traded in a vehicle to buy a new one owed more on their car loans than their cars were worth, compared with 20 percent five years earlier.
The problem has become more vexing as consumers increasingly view life's expenses, from mobile-phone and cable-television bills to car payments and mortgages, in terms of monthly payments rather than total cost. Researchers say few car buyers, for example, know the actual full cost of their vehicles or stop to consider how much more expensive it is to take on a longer-term loan.
But as autos continue to depreciate rapidly and the length of the average car loan flirts with the six-year mark, more motorists are not only paying more for their vehicles, but are often winding up trading them in before they are paid off.
The pattern among consumers to trade in their cars after about three years hasn't changed for decades. But three-year car loans were the norm 30 years ago, when people began looking for a new car as soon as they paid off their current vehicle. Today, many people begin to think about new cars just halfway through the loan term.
The trend reflects the development of consumer habits in a wide range of financial practices from credit- and debit-card use to home buying and investing. People are increasingly likely to buy expen- sive goods and services even when they can't comfortably afford them, and use long-term loans or credit cards to reduce the size of payments while spreading them over longer periods.
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