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Longer Loan Terms Could Hurt Automakers

March 29, 2004

DETROIT--Data from the Power Information Network last week showed that the trend toward longer loan terms for new or refreshed models could ultimately hurt automakers.

An increasing number of new-car buyers are finding that they owe more on their trade than it's worth--also known as an upside-down trade, said PIN, an affiliate of J.D. Power and Associates. Only 25 percent of trades were in this category in 2001; today, 38 percent of trades are upside down.

"If this trend continues, eventually the factory will have to provide a heck of a lot of assistance, which is not good news for the automakers," said Tom Libby, PIN's director of industry analysis. "Right now automakers are legitimately trying to sustain demand and market share through aggressive manipulation of finance instruments, but the long-term ramifications of these efforts are questionable."

The average new-car loan term is now 58 months, up from 53 months in 2001. Therefore consumers who take longer-term loans take much longer to build equity in their vehicle.

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