Longer Loans Here to Stay

With used vehicles battered from declining residual values, especially on domestic brands, dealership F&I managers are seeing opportunities for new-car loans of up to eight years long.

Extended loans beyond six years have begun a growth cycle outside Big 3 captive lenders, which cap their loans at six years. The Consumer Bankers Association estimates that six-year loans have risen to 28% of the portfolio this year, up from 19% in 2002.

Paul Taylor, chief economist of NADA, estimates that “stretch” loans beyond six years will take about 2% of the volume in 2003. Most lenders won't issue 7-year or 8-year loans for less than $20,000.

“The high-end luxury vehicle buyer is the likely prospect for an 8-year loan,” says Maureen Maddox, marketing vice-president of the Summit Credit Union, Madison, WI.

For F&I managers, seeking to maximize profits per deal and raise their yields closer to the $1,000-per-transaction threshold, stretch loans offer a higher reserve because interest rates typically run from 8%-9%, compared to 5%-6% for 4-year loans.

Wedded to automakers, captive lenders frown on extended loans because they keep buyers out of the market for longer periods, and often the vehicle, at the end of the contract, is nearly worthless as a trade-in.

Volvo tested a 10-year loan in 1988 to promote its durability image, but dropped it after a year.

F&I managers are beginning to equate stretch loans as a marketing tool as average vehicle prices top the $27,000 level, and payment shoppers look for extended loans to provide affordable vehicles.

Watson Chevrolet-Buick-Pontiac, Hobbs, NM, now delivers nearly half of its vehicles on six-year loans due to affordability factors, says F&I manager Cynthia Miller. “Longer loans are here to stay,” she adds.

Bayview Auto Finance Corp., Covina, CA, specializes in 6-year (and longer) loans. Interest rates rise to 8% on Bayview's 7-year and 8-year loans. Without down payments, such loans could generate interest of from $6,500-$10,700.