Auto loans used to last four or five years on average, but, in today's cash-strapped era, automakers are more interested in selling cars than profiting from financing, which has resulted in the low interest rates and longer loan terms consumers are seeing today. While some might be concerned that this is the same sort of subprime lending that led to the housing crash in 2008, James Lentz, chief executive of Toyota North America, tells The Detroit News that there's little risk added with these longer loans because defaults typically happen within six months. He also told the newspaper that the longer term options can be the difference between a customer buying a Corolla or a more expensive Camry.
And consider Bradley Gallant's case. The Detroit News reported that he financed a new Honda Accord with a six-year loan at 1.89 percent to divert money to other investments. Compared to a four-year loan on the same car, he saves $130 on his monthly bill and only ends up paying $370 more in interest by the end of the loan. We commend Mr. Gallant on negotiating such loan terms, but it also drives home the point that interest rates must remain low for such loans to be good deals.
In December, we reported that the fastest-growing category in automotive borrowing was the seven-year loan and noted that automakers were reluctant to offer them because it kept customers off the market for too long. Well, apparently, the times they are a-changin' – and they're getting longer.