According to Bloomberg, car loan defaults are higher than they were in 2009. The was the worst year of The Great Recession. One reason is that car companies and financial institutions offer loans that can stretch to 84 months. With high interest rates these can take 40 weeks of income to pay off for a middle class income buyer. That means nearly a year of income to pay a seven year car loan.
The long duration car loan risk is not limited to a few people. According to Cox Automotive, 27% of buyers take loans payable over a period of 73 to 84 months. Interest rates on these loans can reach 6%, which accounts for much of the 40 week payback period
The 84 month loan has a good chance of colliding with a recession. Recessions come in one decade cycles on average . The odds of an overlap with an 84 month car loan is considerable. Default rates on car loans generally rise as GDP falls.
Does an 84 month car loan look good on paper? If monthly payment sizes are the only yardstick. Beyond that, car buyers with long duration loans are usually fools.
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