Tiffany Franc, an attorney in Towson, Md., was surprised when she and her husband had no trouble getting a car loan last October. They had completed a short sale of an investment property in June, and short sales typically damage credit substantially.

They were purchasing a used 2013 Dodge Avenger. They went to their credit union and were approved for an auto loan at 5%. Franc says the 5% rate was “phenomenal” since their credit tanked after the short sale. Yet, they got an even better rate in the end.

“At settlement, our loan ended up being 3.74%,” Franc says. “We received a 0.25% interest reduction with auto debit from my checking account.” The average 60-month new auto loan cost 4.08% when she was in the market, according to Bankrate.

Franc’s story isn’t unusual in today’s market. Credit has become easier to obtain, even for borrowers with lower credit scores. And according to a Feb. 25 report from TransUnion, a credit and information management company, consumers have been taking on increasing amounts of auto loan debt for almost three years straight. The average borrower had an auto loan balance of $16,769 at the end of 2013. Auto loan debt hit a low point in early 2010 at just $14,764 per borrower, and has been increasing ever since.

Why Consumers Are Taking out Larger Auto Loans

Average interest rates on 60-month new car loans are 4.2% right now, according to Bankrate. At this time last year, the same loan cost 4.09%. But back in 2009, this loan cost consumers 6.91%.

Lower interest rates make it less expensive to borrow more money. On a $17,000, 60-month new auto loan at today’s 4.2% average rate, you’ll pay $315 a month and a total of $1,877 in interest over the life of the loan. Back in 2009, at 6.91%, the monthly payment would have been $336 and the total interest expense would have been $3,154, a difference of $21 per month and $1,277 overall.

Consumers aren’t just taking out larger auto loans, they’re also taking out more of them. The number of loans increased by 3.5 from 57 million to 60.5 million last year. One reason for the increase in loan volume is probably the increase in auto sales, which increased to 15.6 million last year. That’s a 7.6% increase from 2012, and a 50% increase from 2009, when annual sales were just 10.4 million. Edmunds predicts even higher sales in 2014. The increase in sales could be increasing both the number and average balance of auto loans.

“Higher prices of both new and used vehicles make for larger car notes,” says Terry Anderson, partner and manager of Auto USA, which consists of two used car dealerships in the Dallas/Fort Worth area. “The new car business is not quite as generous with rebates as a few years ago,” he says, and manufacturers such as GM are no longer flooding the market with inventory, then discounting heavily to make sales. “The price stability has trickled down to the used car business,” he says.

Consumers may also be taking on more auto loan debt, because they’re feeling better about the economy. The unemployment rate fell from 7.9% in December 2012 to 6.7% in December 2013, and consumers are feeling more optimistic. U.S. consumer sentiment has averaged 71.0 since 2008, according to Thomson Reuters/University of Michigan’s overall index of how consumers feel about their personal financial situations and the overall economy. February’s 81.6 measurement is significantly above that average and about 10 points higher than one year ago. Consumers tend to spend more when sentiment is up.

With improvements in the economy, consumers who were finally able to refinance their mortgages gained enough breathing room in their budgets to afford car payments, and consumers who couldn’t afford cars over the last several years finally started buying.

“Consumers held onto their vehicles during the downturn and are now finally feeling better about their own finances,” says Joe Pendergast, assistant vice president of consumer lending at Navy Federal Credit Union, the world's largest credit union serving all armed forces, civilian and contractor personnel and their families. “I believe this trend will continue as economic conditions improve,” he says. “Despite cold weather for most of the country, momentum has remained strong to start out this year.”

How Much Auto Debt Is Too Much?

Despite the increase in average auto debt, only 1.14% of borrowers were delinquent on their auto loans in the fourth quarter of 2013, according to TransUnion. While that’s a slight increase over the 1.09% rate a year earlier, it’s lower than the average delinquency rate of 1.3% that TransUnion has seen in the fourth quarter of every year since 2007.

One reason why overall delinquency rates are so low despite the larger loans is that fewer auto loan borrowers have subprime credit (a score of 641 or lower on a scale of 501 to 990) compared to a year ago, according to TransUnion. Subprime borrowers, however, are struggling more with their loans. The subprime delinquency rate is up from 5.73% in the fourth quarter of 2012 to 6.12% in the fourth quarter of 2013, substantially higher than the overall 1.14% delinquency rate. But Anderson explains why even borrowers with subprime credit can get auto loans right now.

“Our company deals with damaged credit financing. When a vehicle has to be repossessed our losses are lower because of slower depreciation,” he says. “Because we are losing less due to defaults, we are able to loosen our credit standards a little, and sell a few more cars,” Anderson says.

What is an acceptable amount of debt to take on when borrowing money to buy a car? Edmunds says your monthly payment should not be more than 20% of your take-home pay. So if you have an loan with an average interest rate and you’re paying $315 a month, your car payment is affordable as long as you take home at least $1,575 a month.

“My advice for any individual looking to buy is to know what you can afford. Review monthly income, subtract all anticipated expenses, and make sure there’s money left to not only afford a car payment, but also to contribute to savings,” Pendergast says. “Adding a car payment to a monthly budget shouldn’t leave someone without money remaining for things like groceries or unexpected expenses,” he says.

Looking at the big picture, however, is a better idea than looking at monthly payments. What will the vehicle you want to buy cost you in the long run, including retail price, financing over the entire loan term, gas, maintenance and repairs? How reliable is it? How many years is it likely to last? How quickly does it depreciate? Do you plan to drive it into the ground, or sell it for something new after five years? Sources such as Consumer Reports, Car and Driver, Popular Mechanics and Edmunds can help you answer these questions.

The better the long-term value, the more comfortable you can feel spending a little more up front. But if you’re already swimming in credit card debt, student loan debt and mortgage debt, your smartest move might be to pay cash for the least expensive and most reliable used vehicle that will meet your needs.

“If consumers had to save in advance to purchase a vehicle, most would probably settle for a lower priced class of vehicle. It is easier to go into debt than it is to pull hard earned currency out of our pockets,” Anderson says.

The Bottom Line

As the economy has bounced back over the last few years, credit has become easier to obtain and interest rates have gone down. Unemployment has declined, too, and new car sales have increased dramatically. Consumers are feeling better about their finances and about the economy overall, and they can borrow cheaply. It’s a good time to take out a car loan if you must; just make sure you aren’t jeopardizing your overall financial plan by taking on too much debt.

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