Affordable Luxury Makes a Comeback in the Auto Market
By Gina Ragusa Published June 21, 2013 Credit Unions Online
Experian recently reported that BMW, Lexus, Cadillac, Audi, and Porsche sales have soared this year, thanks to an increase in the number of leases and longer auto loan term availability.
"Leasing is definitely back," Melinda Zabritski senior director of Automotive Credit with Experian told CNBC. "People want the lowest monthly payment possible for a new car or truck and many times they can get that with a lease."
She adds that many drivers are using leasing as a way to drive the luxury car of their dreams saying, "A monthly lease payment for a new luxury car is much more affordable way to go for most people." Experian notes that Mercedes and BMW tracked the most leases during first quarter.
Zabritski says that long-term auto loans are also a preferred choice. "Loans of six plus years have become extremely popular, especially those that are 75 months.”
Although many consumers have grown tired of living cloaked under the darkness of the Great Recession and want to sprinkle a little indulgence back in their lives, economists say that leasing or extending an auto loan term in order to drive a luxury car may not always be in the consumer’s best interest.
Richard Barrington, personal finance expert for MoneyRates.com, told The Chicago Tribune that this new direction was a disturbing trend. "Ultimately, it is just another way of getting people to take on more debt," he said. "It is also disturbing that people should feel the need to lengthen out car loans at a time when low interest rates have already made loan payments unusually affordable."
Most lenders offer auto loan terms that can run up to 60 months, with a 32-month term being the norm. However, some lenders are now extending terms up to 72 months (or even longer), which is allowing consumers to go for a luxury car--but at what price?
"When you talk about going to seven years to pay off a car, you are going to be underwater for five of those seven years," said Mike Sante, managing editor of Interest.com. "That puts you in a bind if you need to sell the car."
Bankrate.com provides a vivid example of how the consumer loses in the long run with a lengthy auto loan term: “For example, assume that you buy a 3-year-old car with 36,000 miles on it, which is what the average American would drive in that length of time. If you take out a six-year loan and you drive 12,000 miles annually, the average in America, you would add 72,000 miles. This would mean your car would have 108,000 miles on it and would be approaching 10 years old by the time it's paid off. If you choose to trade it in sooner, you may find it's not worth much, or worse, that you have no equity at all.”
Of course initial sticker shock, bathing in that “new car smell” and visualizing a better life in a luxury car usually gets the buyer before he can consider the ultimate cost, which may be why longer term auto loans make up 16.9% of all new-car loans, up 19.4% from last year.
Get Your Dream Car with a Credit Union Auto Loan
Consumers don’t have to give up their dream of driving their fantasy car just because longer termed loans (and leasing) don't seem to make sound financial sense.
Credit unions throughout the country offer solid-termed auto loans at some of the lowest rates. Credit Unions Online identified a few credit unions currently offering low rate auto loans with terms of 60 months or less:
Navy Federal Credit Union ($54 billion, Vienna, VA) is currently offering auto loan rates as low as 1.49% APR for up to 36 months. The Washington Business Journal recently reported that auto lending is booming at the credit union with $2.3 billion of its record $3.1 billion in consumer loans going to auto loans.
Interra Credit Union ($644 million, Goshen, IN) has experienced consistent auto loan growth for the past few years. Phil Wiens, chief lending officer tells Goshen News, “Not necessarily in the past couple months, but the past couple of years.” He reports that auto loans have grown 8.73% alone. Rates go as low as 2.49% for terms up to 60 months.