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More car buyers taking out 72-month loans as auto prices rise

March 22, 2013|By Jerry Hirsch
  • A shopper looks at Volkswagens at a dealership in Richardson, Texas. Industry analysts expect March sales to be up about 8% from a year earlier as pent-up demand and cheap financing kept the U.S. auto sales recovery powering along.
A shopper looks at Volkswagens at a dealership in Richardson, Texas. Industry… (LM Otero / Associated Press )

Whatever happened to the days of paying cash for a car?  Almost a third of car buyers are now taking out 72-month – that’s six years — loans to purchase their vehicles.

The typical car purchase in which the buyer takes out a loan hit $28,504 so far this month, up about 3% from March of last year, according to market research firm J.D. Power and Associates.  A record 32% of those transactions involved 72-month loans, up from 30% a year ago.

“While longer loan terms have traditionally been a cause for concern to the industry due to the risk of purchase cycle extension, it is not necessarily as daunting as it may seem.” said John Humphrey, senior vice president of the global automotive practice at J.D. Power and Associates.

Low interest rates also make longer loans less expensive than they would be otherwise.

Humphrey said consumers who may have been shut out of the market in recent years are finding that a longer loan makes buying a new vehicle affordable.

People also might be more comfortable with longer loans because the current new cars are more reliable than previous generations and they have become accustomed to holding onto their vehicles longer. The average age of a vehicle on the road has grown steadily over the last decade to about 11 years, according to auto research firm R.L. Polk & Co. 

But shorter-term transactions also are gaining favor. Leases — typically 36-month contracts — will account for 23% of auto sales this month, up from 20% in March 2012, J.D. Power reported.

J.D. Power is projecting another gain for auto sales this month. The company estimates that U.S. auto sales will rise about 8% to almost 1.5-million vehicles compared with March 2012.  That’s about the same rate of growth the industry has experienced through the end of February this year.

“Consumers do not appear fazed by headwinds from Washington, as growth in auto sales are outperforming earlier expectations,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive.

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