U.S. banks are allowing consumers to stretch car loans, to five years and even
longer, data show, indicating some are taking advantage of low interest rates.
By stretching out payments on a car, the total interest may be more, but the monthly payments will be less, which allows consumers to invest elsewhere, the Los Angeles Times reported Friday.
"I will be putting that savings into her college fund," said father-to-be Scott Greenberg, who recently took out a five-year car loan at 2.64 percent, a move that extended his total payments, but allowed him to save $100 per month, on his previous car payment, the Times said.
Consumers are more comfortable with longer car loans in part because cars are lasting longer and come with better warranty packages, the Times said.
Still, car loans in the past were considered long at four years -- and then five.
Auto industry research firm J.D. Power and Associates said 30 percent of the car loans written so far in 2013 have been for six years or longer
Five years ago, only 23 percent of car loans were contracts of six years or longer.
Low interest rates could also fool consumers into buying cars beyond their means. "Someone who really has the budget for a Corolla figures if they extend the financing out, they can buy a Camry," said James Lentz, chief executive of Toyota Motor Corp.'s North American division.
Still some deals are hard to refuse. Plymouth, Mich., resident Bradley Gallant said he borrowed at 1.82 percent for 72 months, which made monthly payments $130 per month cheaper compared to a four-year loan. In the end, he will pay $370 more in total interest, but that is so small, the finance executive figures he can put the $130 per month into an investment that will earn far more than $370.
"I am confident I could invest the cash in alternative investments and earn a much higher return," Gallant said.
Car companies should not mind the trend, either, because the longer the loan the more money they make with very little additional risk.
Personal finance advisers are not huge fans of going into debt and some disapprove of the new trend.
"You really have to do the math. Personally, I don't like paying extra money for the privilege of being in debt," said Casey Bond, managing editor of GoBankingRates.com, a personal finance information company.
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