Toyota Motor Corp. (NYSE: TM), in an effort to help lagging car sales and reduce dealer inventory has decided to open loans to seven years [subscription required], expanding the repayment terms from the more traditional three or four year term. The longer amortization periods naturally reduce the car buyers' payments, but there is no mention of a bigger problem that is very likely and the reason this has not been done before -- cars depreciate rapidly!

George Borst, chief executive of Toyota Financial Services, said at a financial-services conference in San Francisco that the company started offering seven-year car loans in late summer. These loans, which carry slightly higher rates than 72-month deals, (the previous stretch) have risen to represent 4% of all cars Toyota Financial Services lends money on.

In one way, this could be looked upon favorably by Toyota car buyers. The company has a great track record for building quality products. This reinforces that notion of dependability. However, cautious buyers should understand that this may not play out to their advantage. It is possible that some time in the fifth year, the loan will be upside down, meaning it will have an outstanding balance higher than the value of the car. What happens then?

This could be another case of dealers charging more money (interest) to the poorest buyers, who are not aware of the impact these loans may eventually have. Reminds me of the mortgage mess. In hindsight, the government should have examined the mortgage industry and Wall Street's business practices and risk. Who's watching now?

Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm.