Loan Terms of Endearment

Car buyers once paid big down payments, then took only a few years to pay off the remainder of what was owed.

Those were the days.

“I recall when a 48-month loan was stretching it,” says Andrew Blazsanyik, executive director-training for Resource Automotive, a finance and insurance firm. “If you had to go beyond that, you couldn't afford the car.”

He and fellow attendees of an F&I Management and Technology conference briefly waxed nostalgically about those days. They spent more time discussing the effects of today's loans, with extended terms that leave stretch marks.

“I remember when 60-month loans were a big deal, and now they are standard,” says Ricky Wolfe, president of business development for EFG Companies.

Loan terms that keep getting longer are a “challenge of change,” says David Jones, vice president-plans for General Motors Acceptance Corp.

Putting it stronger is Kelly Mankin, vice president-Chrysler brand marketing at DaimlerChrysler Financial Services Americas.

“It's a cancer on the industry,” he says.

Jones recalls when 48-month loans were the standard. He says GMAC has seen a steady increase in business going beyond 60 months; primarily 72 months, “but I've seen 84 months.”

Seventy-two-month payback terms account for 50%-60% of GMAC vehicle loans, he says. “The West Coast and the Northwest seem to be going to 72 and 84 months at a much more rapid pace than the rest of the country.”

Are longer-term loans beneficial?

“I'd have to say yes and no,” says Jones. “No, because you wonder about it in terms of customer satisfaction, not today, but later. No, because it lengthens the buying cycle. No, because it causes negative equity.”

On the positive side, lengthening loans makes vehicles more affordable, monthly payments smaller and dealership deals easier to close, he says.

He adds: “But you can't ignore the negatives. Are we creating a situation we won't be able to get out of? I'm sure the same issues were raised when we went from 48- to 60-month loans.”

Longer loan terms are here to stay, Jones says. “We need to manage them, not hurt the trade cycle and not create a negative-equity monster.”

Mankin says he's “a bit of an evangelist” in preaching against the dangers of multi-year auto-loan terms that run the risk of becoming apocalyptic for some consumers, especially those whose eyes for a pricey car on the lot are bigger than their wallets.

“Look, there is a place for extended financing, but as an industry we are defaulting to it because it is easy,” Mankin says. “We should explain the impact on customers.”

For instance, he says, a customer with a 72-month loan should know there will be a point where the vehicle is out of equity, or worth less than what remains owed on it. Being “upside down” like that can, among other things, sour a prospective trade-in deal.

“It is up to us to explain options to customers,” says Mankin. “One of those is leasing, which is a viable alternative to extended payments.”

Finding success with leasing as such an alternative is Frank Bennett, business manager of S&L Motors, a Chrysler-Dodge-Jeep dealership in Pulaski, WI.

He says, “One thing we are doing here, to rectify this type of thing (over-extended loans) from compounding, is offer leasing as an option.”

He says about half of his dealership's recent new-vehicle deals are short-term leases of 27-39 months.

“Leasing is a great tool when properly disclosed and presented early in the process, rather than a last resort,” says Bennett. “We even have customers who have bumped their payments to ensure they have a short-term lease vs. a payment plan that will take them years to complete.”

The risks of vehicle repossessions aside, long-term loans that are properly paid off provide higher profits to lenders. That's more alluring to independent finance firms than those affiliated with an auto maker.

“If we looked at extended terms strictly from a profit perspective, my God, we'd be doing 96-month loans,” says DaimlerChrysler Financial's Mankin. “But that's contrary to our mission of selling new cars.”

Still, he says, “we tend to go the easiest route first, and that's the (monthly) payment. In Detroit, if the auto loan's monthly payment is more than the monthly cell-phone bill, you sometimes can't close the deal. I'm not being facetious. I see $59-a-month loans.”

Customers buying pickup trucks seem drawn to longer-term loans and low monthly payments, says David Nordstrom, corporate manager-product and planning for Toyota Financial Services.

That can hurt vehicle owners at trade-in time, leaving them crestfallen if they are expecting a positive trade value to defray the cost of a new-vehicle transaction.

“We've been looking at the pickup market, and 25% of pickup truck trade-ins are upside down,” Nordstrom says. “That's the deal you got to put together. Those customers are upside down usually because they took out 60 or 72 month loans.”

How did the consumer of yesteryear manage to buy a car and pay it off in three to four years compared with six to seven today?

“Back then, we asked for more of a down payment,” says Tom O'Connor, manager-sales support for Ford Motor Credit Co. “And we ‘sold' the car. Today, it's about the deal.”

Adds Nordstrom: “People have a lot more debt today. They are creating more debt. And they have to extend it out to lessen the load.”

Dealership finance and insurance managers have a double duty of putting together automotive payment plans and keeping customers out of financial trouble, says Bennett, the Wisconsin dealership F&I manager.

He explains, “We as sales professionals in this industry owe it to our future success and longevity to educate the customer as to their options.

“They are ultimately responsible for making the decision. But if we would all stop for a few minutes during the sales process and explain what options are available vs. just taking the path of least resistance, we all would be taking a great step in eliminating this reliance of being prisoners of credit.”

But offering financial advice — however wise it might be — to an unreceptive customer carries the risk of making that person an ex-customer, says Marshall Friedman of Dartmouth Motor Sales in Newport, NH.

“No dealer is going to preach to their customers and send them down the street to get buried by another dealer,” says Friedman, a 31-year veteran of auto retailing.

He recalls what happened early in his career when he tried to dispense safety advice to a would-be buyer.

“As a new Ford sales guy (and investor), I explained to a customer — who lived on and traveled over a brutal mountain road often covered in ice, snow, and sand — that a purchase of a 1970s Bronco was near suicidal, and he should consider a 4-wheel-drive, well-balanced Ford truck.

“He left and went elsewhere to find the Bronco. I don't know if he lived, but I learned.”

Meanwhile, big subprime lender AmeriCredit is stepping up its 72-month lending.

More than 50% of its loans are for that long. AmeriCredit CEO Dan Berce says the percentage will increase “somewhat” to keep up with competitors.

Additional finance charges from the longer loans will more than offset risks involved, and, besides, the perils of borrowers defaulting aren't that much more for 72-month terms compared with 60-month, he says.

If the trend continues, tomorrow's auto loan terms may be measured in decades. Presumably they won't be the same duration as home loans. Or will they?

“If vehicle financing hits 96 months and the borrower lives in his car, maybe the loan will qualify as a mortgage,” quips F&I consultant Ron Reahard of Reahard and Associates.

Cell-Phone Feature Thwarts Car Thefts

A firm called Inilex has come up with a new cell phone feature that could be the latest anti-theft item sold in dealership finance and insurance offices.

Inilex bills itself as offering equipment that lets customers monitor “their mobile assets.” That includes vehicle tracking on demand, motion detection, speed monitoring, door locking and unlock and auto start — all of which can be sent to the user's cell phone.

Inilex says the most unusual feature it offers is the QuickFence. It gives customers the ability to secure their parked vehicles using their cell phones.

The GPS system sets a virtual fence around a vehicle. If it moves outside the “fence,” the customer is notified via cell phone text message.

The car owner, in turn, can relay the exact day, time, speed and direction to the police, who recognize it as a “crime in progress,” says Inilex CEO Scott Ferguson.

It is a higher priority for the police to respond to than simply reporting a vehicle theft which they consider a “crime committed,” he says.