Lenders keep watchful eye as new-vehicle loan terms grow

UPDATED: 4/8/14 3:04 pm ET - corrected

Editor's note: An earlier version of this story misstated data, from Experian Automotive, on loan terms for new and used vehicles in the fourth quarter of 2013, and the change from the fourth quarter of 2012.

For the time being, F&I managers can probably count on lenders to keep approving extra-long loan terms to offset higher loan amounts.

Lenders are keeping an eye on the rise in loans with terms of 72 months or longer, but the effect on the average loan term overall has been gradual, said Thomas King, senior director at the Power Information Network.

"A lot of people are going from a 60-month loan to a 72-month loan. Putting on an extra 12 months isn't a particularly major shift," King said in a phone interview last week.

According to PIN data, in February loans of 72 months or longer accounted for 32 percent of new-vehicle retail sales volume -- a record level for any month. King said loans of 84 months or longer -- potentially the ones to worry about -- were only about 2.9 percent.

King said the rise in long-term loans of 72 months or more isn't a big issue because people are also keeping their vehicle longer on average.

"Since so many people are keeping their cars six, seven, eight, nine years, whether they're paying over five or six or seven years ultimately isn't that important," he said.

King said the downside for longer loans most analysts point to -- that the customer is more likely to be upside down at trade-in time -- is worst for people who have had consecutive long-term loans and refinanced their negative equity each time.

That's still a relatively small population, King said. "As long as it's not the most popular loan term around, that's OK," he said.

Experian Automotive reported on Tuesday that in the fourth quarter of 2013, loans of 73 to 84 months were the fastest-growing category compared with the same quarter a year earlier.

According to Experian, 73- to 84-month loans accounted for 20.1 percent of new-vehicle retail volume in the fourth quarter, up 19 percent from the 2012 period. For used vehicles, the category increased 23.2 percent year over year, to 12.5 percent of retail volume, Experian said.

The average new-vehicle loan term was 65 months, even with a year ago, Experian said. The average used-car term was 61 months, up one month.

In January, at an auto finance conference, some lenders said they had reservations about extra-long loans but emphasized that in some cases, a long term is the only way to get a deal done.

You can reach Jim Henry at autonews@crain.com

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