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Credit unions take long-loan lead

84- and 96-month terms gain as buyers seek to keep their monthly payments low

Trending longer
Longer-term loans have grown as a share of all auto loans arranged through the Credit Union Direct Lending network.
 Share of all loans written
 Jan.-JulyJan.-July
Loan lengths20132014
73-84 months47.80%49.60%
84+ months5.50%6.70%
Source: CUDL

Credit unions are helping lead the charge into longer loan terms as customers seek to keep their monthly payments flat while taking out larger loans.

"We are seeing declines in 72-month terms and below, which used to be more popular," said Marci Francisco, vice president of automotive marketing and business development for CU Direct Corp., in Ontario, Calif.

"This year, we are really seeing measurable increases in the 73- to 84-month category," which is mostly 84-month loans, Francisco told Automotive News last month. Volumes are smaller for loans longer than 84 months, but credit unions are experiencing growth in 96-month loans, CU Direct data show.

Longer terms mean lower monthly payments for consumers, and more sales for dealerships in the short term.

The potential downsides for dealerships are down the road, analysts said: longer trade-in cycles and a greater likelihood that at trade-in time, customers will owe more on their trade-ins than the vehicles are worth.

But credit unions defend the longer loans, saying they take precautions to ensure that they're not putting their members' deposits at risk by lending those funds in the form of lengthy auto loans that may not be repaid.

'Niche product'

"It's not a huge piece of our portfolio, but we do have 84-, 96-month loans," said Rich Syme, executive vice president for America First Credit Union, in Ogden, Utah. "We don't do many 96-month loans, but we do a number of 84-month loans."

"I think it is a niche product," he told Automotive News.

He said most credit union members don't keep their vehicles that long, but they do usually keep their vehicles long enough -- 48 months or longer -- so that they don't owe more than the vehicles are worth.

"It's like any loan," he said. "If you keep it two or three years, you're going to be underwater, obviously -- and we do see that sometimes, absolutely."

Syme said the credit union is selective about who gets approved for such long loans, and what kind of car they're buying.

"We found especially for some of the higher-priced cars, it's a way to get payments to where our members are comfortable. Obviously we wouldn't do an 84-month payment on a $10,000 car, but for a higher-priced car for a member with a high FICO score, we would," he said.

"If they keep it for a certain period of time and keep the car or truck in good condition so their trade-in value is good, they're not going to be upside-down," Syme said.

Still, Dave Campbell, finance director at Central Houston Nissan, in Texas, said "I'm not a fan" of 84- or 96-month loans.

"An 84-month contract removes a customer from the trading cycle for too long. As a dealership, we make our money on auto purchases, on repeat business, on referrals, on purchases that keep people coming back," he said.

"If somebody takes an 84- or a 96-month loan, there's no way you're getting them back in three or four years, which is what we want," he told Automotive News.

He said his dealership offers loans barely beyond 72 months, but he said the dealership's finance managers try to discourage longer terms. "We could do a lot more," based on customer demand, he said. Campbell estimated his dealership only originated two 96-month loans in the past six months.

F&I managers at the dealership point out to customers that longer terms mean higher interest expense over the life of the loan, he said. "At 96 months, all you're paying is interest," Campbell said.

Mark Kaczynski, president of captive finance company Nissan Motor Acceptance Corp., wrote in an email that Nissan Motor Acceptance has stuck with a policy it launched in 2012 of capping loan terms at 75 months. He said Nissan Motor Acceptance doesn't want to lose customers who insist on loans longer than 72 months, but the lender doesn't want to extend loans to 84 months or longer.

Almost half

Nevertheless, longer terms are an inescapable fact in the auto finance industry.

For CU Direct, loans to credit-union members with terms from 73 to 84 months accounted for nearly half -- 49.6 percent -- of all new-vehicle loans for the first seven months of 2014, the group said, up from 47.8 percent in the year-earlier period.

During that period, all categories of CU Direct's shorter-term loans lost share.

Loans beyond 84 months -- mostly 96-month loans -- accounted for 6.7 percent of the CU Direct total for the 2014 period, the group said, up from 5.5 percent a year earlier, or a 22 percent jump.

CU Direct's Credit Union Direct Lending network, or CUDL, includes more than 1,100 credit unions that use the CUDL system, doing business with more than 11,200 U.S. dealerships. About 80 percent are franchised new-vehicle dealerships; the rest are independent used-car dealerships.

Credit unions are ahead of the curve, but the rest of the auto finance industry also is experiencing growth in longer terms.

Across the auto finance industry, Experian Automotive data show, loans of 73 to 84 months accounted for 24.1 percent of new-vehicle loans in the second quarter of 2014, up from a 19.5 percent share in the second quarter of 2013.

New-vehicle loans beyond 84 months were in the very low single digits industrywide, Experian said.

Longer loan terms, in addition to stretching trade-in cycles, mean that customers are more likely to be upside-down at trade-in time. For many customers, that means they need to borrow more to finance their next purchase.

Thomas King, senior director at the Power Information Network, run by J.D. Power and Associates of Westlake Village, Calif., a unit of McGraw Hill Financial Inc., said most analysts aren't too worried about negative equity.

"For now, the magnitude of the risk is modest," he wrote in an email.

According to Power Information Network data, the percentage of buyers who have a trade-in who also had negative equity has increased slightly. Through Aug. 17, that number was 27.1 percent, up from 25.6 percent for the first eight months of 2013.

King said risks posed by longer terms would increase if many more borrowers switched to even longer terms, such as 84 months or longer, or if many more borrowers made bigger jumps, say from 36 months to 72 months or longer.

For now, he said, the trend is for borrowers to extend their terms one year at a time when they come back to the market -- from a 60-month loan to a 72-month loan, for instance.

King said a rising share of leasing is also helping to bring down the average trade cycle, since the average lease term is around 36 months. He said leasing "creates a pipeline of buyers with shorter purchase cycles."

Trending longer
Longer-term loans have grown as a share of all auto loans arranged through the Credit Union Direct Lending network.
 Share of all loans written
 Jan.-JulyJan.-July
Loan lengths20132014
73-84 months47.80%49.60%
84+ months5.50%6.70%
Source: CUDL

You can reach Jim Henry at autonews@crain.com

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