Auto sector feels pinch of credit crunch

A typical car loan lasts five years, but many are now stretching to six — and even seven —  years, according to data from the Power Information Network, a division of market research company J.D. Power and Associates. In January, Toyota started offering the previously rare seven-year loans to customers.

Longer auto loans are a dangerous road for car buyers, who can end up “upside-down” on a loan, meaning they owe more money than the vehicle would be worth if they sold it. For example, the average lease on a $20,000 car with a 7 percent interest rate for seven years can saddle the lessee with an additional $5,335 in interest alone — roughly one quarter of the car’s entire price, according to LeaseTrader.com.

For U.S. automakers, longer loans could mean added pressure as they work to turn around their North American operations. If more car buyers are locked into longer car leases and loans, they’re unlikely to buy new cars as often. U.S. auto sales are already expected to be weak this year because of the harsh economic climate and a dearth of appealing new models on offer.

After slow performance in January and February, J.D. Power and Associates now expects new vehicle sales for 2008 to reach their lowest levels since 1995, dropping to 14.95 million cars and light trucks. J.D. Power previously forecast new-vehicle sales for 2008 to be 15.7 million vehicles. Annual sales of about 16 million are generally seen as healthy.

“Declining consumer confidence and spending, as well as turbulent financial and economic market conditions, are primarily driving the decline,” said Jeff Schuster, executive director of automotive forecasting for J.D. Power.

The big U.S. automakers are relatively sanguine about the outlook for sales, and they say they’re not seeing a dramatic increase in loan delinquencies.

General Motors Vice Chairman Bob Lutz said recently that the automaker still expects sales to head higher in the second half of 2008, but may revisit that assessment. Top executives at Chrysler, the U.S. automaker acquired for $7.4 billion last year by private equity firm Cerberus Capital Management, have said publicly they are not planning on seeing sales rebound in the second half of the year.

With consumers’ concerns about high gas prices, the housing slump and tightening credit unlikely to abate, John Sternal, head of marketing at LeaseTrader.com, expects business to pick up this year as more drivers like Jorge Valdes opt to downsize their auto leases before they run out. He expects his site to see 45,000 lease transactions this year, up from 35,000 in 2007.

“Your car payment is typically your second biggest monthly payment, and over the last six months we’ve seen a 25 percent increase in customers looking to downsize to a smaller vehicle, or something more fuel-efficient,” Sternal said. “For us, that’s significant because we normally only see a 2 percent shift here or there, and it definitely correlates with what’s going on in the economy.”

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