The response of the automotive finance industry? Extend loans further and allow the indebted customer to roll what he owes into a new loan with little, if any, effect on his new monthly payment. In effect, the driver is paying a loan on two -- or more -- cars at once.
Richard Apicella, head of Benchmark International's auto finance division, published a report on car loans last month that called the ever-lengthening deals a "dangerous" problem. Combined with Americans' desire to drive new cars every few years, he said, the effect "is like a drug. Once you get hooked on it, it gets harder and harder to break the cycle."
From the point of view of those who sell cars and car loans, long-term loans are good for business and good for buyers.
"The job of a successful dealer is to find a funding package that's acceptable to the customer," said Paul Taylor, chief economist of the National Automobile Dealers Assn. "These loans allow them to get a luxury car rather than a more modestly priced vehicle."
Cindy Gerhardt has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.
Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle -- and increase her debt by another $25,000.
"It's our own fault that we traded in vehicles so many times, but we never thought it would get to this," said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. "Not one dealer ever said this was a problem. Ever. I never had a dealership say no."
It's not just individual consumers who are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn.
