September 14, 2007:  According to Jesse Toprak, executive director of industry analysis for Edmunds.com, "Most consumers still come into dealerships and tell the salespeople that they want to pay a certain amount of money per month for their car."  He adds that, "That is probably the single worst way to shop."

Toprak also cites Edmunds.com research indicating that financing terms are lengthening: the average financing term for loans on new cars now exceeds five years, or 63.8 months, as of August 2007.  That's up almost 7% longer from five years earlier when the average term was 59.8.

JD Power & Associates reports that some loans are now as long as eight years.  Their research indicates that nearly 39% of all auto loans made so this year through August had terms of between 72 and 83 months.  In 2004, the comparable percentage was 31%.  Almost 4% of all loans made this year had terms of 84 months or longer, up from 2.4% in 2004.

Longer terms help to lower monthly payments, allowing consumers to purchase more expensive vehicles.

But longer terms pose risks for lenders because cars and trucks depreciate rapidly. Most vehicles lose up to one-third of their value when they are driven off the lot. So the longer borrowers stretch out payments, the more time loans spend underwater — a term meaning the balance is bigger than the value of the vehicle securing it.

Longer auto loans are also a bad deal for borrowers, who end up paying more interest over the life of the loan.

And the longer the loan, the more likely owners will still be making payments when they want or need to buy a new car, a concept known as "negative equity." "At least one in four customers who trade in a car have negative equity," says Toprak.

"Other businesses, like banks, are the ones that are really pushing longer-term loans," says Ford Motor Credit spokeswoman Brenda Hynes. "Any sort of loans that we do, we're basically following that market to be competitive. As far as the effect of the current credit crunch, we aren't seeing any change, and our purchase policy hasn't changed, and thus the length of our contracts haven't changed either." How much negative equity? The average is at least $3,000.  Negative equity is part of the reason that U.S. auto manufacturers offer up to $5,000 in cash rebates for new models.

Lenders are willing to make riskier loans in part because auto sales are down. That makes lenders more flexible in lending to people with less than perfect credit. Toprak says this is particularly true of lenders tied to automakers, such as GM and Ford.

"For most customers, if they can't get a car loan, they can't buy a car," Toprak says. "The 72-month loan is becoming more of a norm than an anomaly."

S&P says that mortgage problems aren't as pressing a concern for subprime auto lenders as they might be for other lenders because fewer people taking out auto loans own homes. In subprime auto loan pools, the percentage of homeowners can vary from 0% up to 50%, lender by lender.