Over the past few years, auto loan terms have increased in length. Many buyers want to reduce monthly payments by spreading them out over a longer period. When it comes to trading in an older vehicle to buy a new car, however, people now find that their vehicle has less value than the amount of the outstanding loan.
According to new research, a record number of people are in this situation, with 32 percent of all trade-in vehicles across American dealerships falling into this category. It means that those buying new vehicles have to find money for the car and also pay their remaining loan balance. Credit industry expert Greg McBride said that this situation had been a long time coming, due to longer loan terms in the industry, higher purchase prices, and smaller down payments.
On average, car loans have now increased to 68 months. Borrowers with subprime levels of credit extend repayments over an even longer period - 72 months, says Experian Automotive. "It's problematic for the consumer because there's no foolproof way to eliminate his financial exposure. If the car gets stolen, is totaled or you get new car envy while you're upside down then it's a big problem," McBride says.
Not only have car loan periods extended, but vehicle prices have also risen. The consumer demand for large, fully-equipped SUVs, pickups and crossovers means the average price for a vehicle is now up to $34,000. The average loan amount increased by 4.8 percent from April to June 2016 compared to the previous year, with people borrowing $29,880.
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