LAS VEGAS – Longer car loans are on the rise, a trend that worries some dealers.
“Financing is getting out of hand with 72-, 84- and 96-month loans,” says William Underriner, chairman of the National Automobile Dealers Assn. “The customer will always be upside-down on the car.”
For a time, many lenders had backed away from protracted loan paybacks, saying they present greater risks as time goes by. Long-term loans declined during the credit freeze of 2008 and 2009.
“But guess what? They’re back,” says John Gray, vice president-marketing at Experian Automotive, which tracks credit performance. That is because credit is more available and lenders are more competitive.
Auto lenders of various types are “open for business,” says Marc Sheinbaum, president and CEO of Chase Auto Finance. “We just need to be careful that we don’t get ahead of ourselves with underwriting.”
Auto loans of 72 to 84 months represent 28.4% of the market, compared with 24.4% three years ago, Experian says. The average credit score for borrowers in that segment is 709 compared with an overall average of 682.
Many car buyers are drawn to longer loans because they reduce the monthly payment, even though they ultimately increase the cost of the loan.
“The longer you go out, the lower the monthly payment,” Thomas Gilman, president and CEO of TD Auto Finance, says at an American Financial Services Assn. conference here. “It is driven by lower monthly payments.”
In an electronic poll, 51% of conference attendees say financing terms of 84 months and longer are generally a bad idea; 37.6% call them a bad idea driven by competition; and 11.4% approve of them, saying they allow people to buy cars they couldn’t otherwise afford.
Detractors fear long-term loans increase the chances of borrower default; enhance risks to lenders when money owed exceeds the value of the car; and keep consumers out of the market too long.
“Eighty-four month loans do a disservice to dealers,” says Andrew Stuart, president and CEO ofCredit. “They are not something we will do.”
He describes leasing as a better option for customers who want to avoid high monthly car payments.
Underriner, a Montana dealer, advocates leasing as a benefit to customers and dealers alike. “With leasing, a customer is back at the dealership in 24 or 36 months deciding what to do,” he says.
Many people “recognize the damage 84-month loans can do,” says John Hyatt, president of Bank of America’s Dealer Financial Services. “They are bad for us, dealers and the public. I think you will see the industry cap out at 72 months and dealers resist 84-month loans.”
Auto-financing veteran Gilman remembers when car loans seldom exceeded 24 months.
“If someone can’t afford the monthly payments of a 72-month loan and has to go to 84, maybe that consumer should look at a used car rather than a new one,” he says. In some cases, the auto industry has “done a bad job putting the right people in the right vehicles.”
Multi-franchise dealer Vince Sheehy, president of Richmond, VA-based Sheehy Automotive Stores, agrees.
“Eighty-four month loans are a bad idea, even if the customer thinks they are a good idea,” he says. “It is much better to get customers in cars they can afford.”
Customers who opt for longer loans initially may think they are beneficial, but can sour on them as the aging car depreciates in value, says Scott Krenz, senior vice president and CFO forAutomotive Group, a dealership chain.
“If you have a car underwater, the customer will not be going back (to the dealer who sold the vehicle),” he says.
Rick Cowart, executive manager of Sewell Infiniti of Dallas, says, “You are the bad guy if you provide the 84-month loan.”
Many car consumers are payment shoppers, notes Bill Muir, president ofFinancial.
“To them, it is about the payment,” he tells WardsAuto. “I remember when 36-month loans were the norm, then 64 and now 72. Some credit unions in the West do 96-month car loans.
Muir disputes the claim that 84-month loans automatically elongate buying cycles, noting that customers can and often do trade in cars for new ones well before a loan is paid off.
“There is nothing inherently wrong with an 84-month loan to the better-credit customer,” he says. “But I would be reluctant to do loans like that to subprime customers.”
Lenders resist extending long-term loans to subprime borrowers, says Jim Landy, head of CarFinance, a subprime lender.
“I don’t think capital markets are particularly receptive to 84-month subprime loans,” he tells WardsAuto.
On the other hand, if consumers with good credit want to buy an expensive car that they can afford, “it might make sense to go for an 84-month loan,” Landy says.