Loan terms stretch as new-car prices rise

First comes sticker shock.

Then comes loan shock.

If you want to buy a new car soon and will need financing to help pay for it, the chances are 3 in 4 that you'll still be paying off that loan into the 21st century.

New-car loans, which once ran three or four years, now stretch five, six, even seven years.

At Bank One Milwaukee, which makes more auto loans than any other bank in the state, 73% of all car loans are for five years or longer, said Dave Frank, vice president for auto-dealer financing.

The reason is simple: New cars cost a whole lot more than they used to.

The average cost of a new US-made car has jumped more than 30% since the early 1980s, after adjusting for inflation, according to the US Commerce Department. And the cost of foreign cars has soared more than 70% in the same period, in inflation-adjusted dollars.

The average new car now costs more than $20,000, more than half the average family's annual income, up from one- third of family income two decades ago, according to US government figures. So the only way to make new cars affordable is to stretch out the loan.

The third-grader who helps you pick out the color of your new car this year may be behind the driver's wheel before the last payment is made. Leasing, Truck Sales Boom

And that's why the market for buying new cars has stalled badly.

The big switch is to leasing.

"Leasing has gone from 8% to 10% of our business a couple of years ago to almost half of our business now," said Tom Bonesho, vice president of the Boucher Group, which owns 10 auto dealers in southeastern Wisconsin.

A car that would cost $300 a month on a 60-month loan will cost $235 monthly on a 36- month lease, he said.

The downside: With leasing, payments never end.

The upside: Monthly payments are less, and you turn the car in before having to make the first big round of investments, on things like tires and brakes.

Nearly 1 in 4 new cars sold in Wisconsin are leased to a consumer rather than sold outright, said Steve Drew, an analyst with Automotive Directions, a market research firm based in Madison. The proportion of leases is growing rapidly, he added.

Annual new-car sales in Wisconsin fell 17.1% in the past five years, to 148,209 last year, according to the state Department of Transportation.

Considering the fact that those figures don't distinguish between new cars sold outright and the rapidly growing proportion of new cars that are leased, one concludes that the number of outright sales of new cars is falling sharply.

In some cases, consumers are switching from cars to small trucks. Annual new-truck sales in the state rose 24.4% from 1989 to 1994, to 125,710.

"Sport utility vehicles $26,000 to $32,000 that market's booming," said market analyst Drew. Shift Toward Used Cars

But even when truck and auto sales are combined, the long- term trend is down, despite the boom in small trucks and leasing.

People in the business of selling and financing cars say there's a shift toward used cars, partly to offset the high cost of new vehicles and partly because improved quality has made people more comfortable buying used.

Indeed, sales of used cars and trucks grew 2.2% in the past five years, compared with a 2.1% drop in the sale of new vehicles, which includes the surging lease market.

But trends in used-car sales differ sharply in locations around the state.

In Waukesha County, for example, there's no difference between the increase in sales of new compared with used vehicles, according to Automotive Directions.

But in Milwaukee County, there was a big jump last year in sales of used cars and trucks compared with sales of new cars and trucks. Used-vehicle registrations jumped 10.3% in the fourth quarter of the year, while new-vehicle registrations rose only 3.4% for the year.

Copyright 1995
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JACK NORMAN "Loan terms stretch as new-car prices rise". Milwaukee Journal, The. Jan 29, 1995. FindArticles.com. 16 Jun. 2008. http://findarticles.com/p/articles/mi_qn4207/is_19950129/ai_n10183050