Longer loans return to help boost sales
Faunda: People want lower payments.
The long loans that were used to goose car sales a few years ago are back.
Finance managers say auto lenders are promoting loan terms of 72 months and even 84 months, as they did just before the credit markets crashed in late 2008.
"Customers have no aversion to signing longer-term notes these days," says Marv Eleazer, finance director for Langdale Ford in Valdosta, Ga. "I'm seeing 72-month loans at 120 percent [loan-to-value] and greater. I've even papered a few at 84 months."
In 2011, loans of 73 months and longer account for 9 percent of new-vehicle loans. That's up from 6 percent in 2009 and 2010 and close to the peak of 10 percent in 2008, reports consulting firm J.D. Power and Associates.
Loans of 61 to 72 months make up 40 percent of the loans written, J.D. Power data show.
The longer term lowers monthly payments, which appeals to many shoppers.
While unemployment remains high, consumers "just want their monthly payments cheaper," says Greg Faunda, business manager of Greenwood Chevrolet in Austintown, Ohio.
At a recent finance and insurance conference in Las Vegas, keynote speaker Kevin Borgmann, president of Capital One Auto Finance, said he feared looser credit terms and extended loan terms could short-circuit the auto sales recovery.
His concern: The longer maturities will keep people out of the car market for six or more years, stalling sales.
But in recent years, that hasn't been the case. Several factors take the edge off long loan terms:
-- Car buyers are making bigger down payments after the credit crisis, finance managers say. Used-vehicle values also are strong. Both help people build equity in their vehicles quickly.
-- Consumers often trade in vehicles before the loan expires, says Paul Taylor, chief economist for the National Automobile Dealers Association. So they'll be back for another car sooner than you think, he says.
-- Healthy lease volume will bring people back for another car sooner, says Tom Kontos, chief economist for the ADESA auto auction group. Currently, more than one in five new vehicles is leased, and leases are typically three years, he notes.
Since 2007, Toyota Financial Services has offered its most creditworthy customers 84-month loans. The seven-year loans represent just 2 to 4 percent of its loan portfolio and most are paid off early.
Brock Bayles, Toyota Financial's national manager of pricing analysis, says the extended term is one of several strategies the lender uses to stimulate sales. The long loans "support the automotive recovery," he says.
Recent history suggests long loans could become the new normal. Auto loan maturities have been increasing as new-vehicle prices rise.
From 1971 to 1983, three-year car loans were the norm, reports the Federal Reserve in its data from finance companies.
In June 1984, the average maturity exceeded 48 months for the first time. In 2003, the average maturity exceeded 60 months for the first time.
Since then, the average term has zigzagged upward peaking at 67 months in July 2008 and never dipping below 59 months. In January, the latest figure available, the average maturity was just over 62 months.
"Customers gravitate toward lower payments, and extended terms provide more affordable options," says Gary Allgeier, finance director for the Suburban Collection dealership group near Detroit.
"Since many lenders have relaxed terms to 2008 levels, it should be no surprise that customers are choosing them."