Longer-Living Vehicles Support Longer Loans

Auto loan terms are getting longer.

For some people, that’s good news; for others, bad, or at least not so hot. But it is a reality of today’s vibrant vehicle-sales market as automakers, dealers and lenders rush to meet customer demands.

Conventional wisdom of yesteryear was that extending a car loan past five years was looking for trouble. But that was back when vehicles didn’t live as long as they do now.

Better-quality vehicles makes for longer-lasting vehicles, which, in turn, makes longer loan terms possible without lenders sailing into sandbars.

“Term lengths are extending out, and vehicle quality supports that,” says Tim Russi, Ally Financial’s president-Global Auto Services. “I don’t see it as a bad thing. I see it as an evolution. The key is the quality of the vehicle.”

That’s important because of an auto-financing industry adage: When the car dies, the loan payments tend to stop.

Jason Kulas, president and chief financial officer of Santander Consumer USA, agrees with Russi during a panel discussion at the American Financial Services Assn.’s 2015 vehicle-finance conference.   

A long-term loan only is bad if it’s done badly, Kulas says. “There’s good term and bad term.”

He questions the wisdom of a dealer telling customers they can buy one car with a 60-month loan but yet a better car with a 72-month loan. “We don’t see a lot of that, though. I think people are using term responsibly.”    

Loans beyond 60 months now are at 60% of vehicle financing “and rising,” says Michael Buckingham, J.D. Power’s senior director-Auto Finance Practice. “The spreads between 60 and 72 have greatly tightened.”

Seventy-two months is “pretty much a standard deal,” Russi says.

For the finance industry, longer-loan terms represent “a watch item,” Chase Auto Finance CEO Thasunda Duckett says at the 2015 J.D. Power Automotive Summit in San Francisco. “But with cars staying on the road longer, you can support it.”

Also supporting it are relatively low interest rates, says Joy Falotico, an executive vice president at Ford Credit. “It’s different when rates are lower. If they’re higher, you can get into negative equity.”

She adds, “The demand (for longer loans) is out there. You need all the tools in the tool box. If dealers are offering longer terms, you need to make sure the tools for it are there.”

Yet as a captive finance company, Ford Credit is not strictly interested in financing car deals. It also works with the parent automaker to sell new vehicles coming off the Ford assembly plant lines.

“Captives are different,” Falotico says. “We’re also pushing product.”

Many dealers dislike protracted loans on the premise that they take customers out of the market too long. But some lenders say that’s not always the case. Just because a person is paying off a 7-year car loan doesn’t mean he or she will keep the vehicle that long.

“It will be interesting to see if people on long terms go the full length of the terms,” says Kirk Cordill, president of BMW Financial Services.

Few people advocate loans of eight years or longer on a car, even ones built to last. “I think we’ll see term hold the line,” says Brian McCafferty, dealer principal at Avalon Toyota and One Toyota of Oakland.

He follows a policy at his stores. “Anything over 72 months, I sign off on,” he says. “There are 84 and 96 month loans out there. That’s not the way to go.”

It comes down to whether the borrower fulfills his financial obligations, Russi says. “We put a loan out, we want to be repaid.”

About 25 million vehicle loans were active in 2014. Car loans delinquent by 60 months or more make up only 1% of active financing, says loan-data tracker TransUnion.  

But some loan defaults are inevitable, what with volumes that high and particularly with subprime lending increasing.

“Will some (lenders) get burned?” asks Tom Webb, chief economist at remarketing services provider Manheim. “Yeah, some will. But we learn from every cycle, so the next one won’t be so bad.”

Adds Steve Chaouki, a TransUnion executive vice president, “If you don’t want losses, don’t lend money.”

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