UPDATED: 10/1/14 1:01 pm ET - adds details
Ford Motor Credit Co., one of the biggest lenders in new-vehicle financing, has joined the trend toward longer auto loans, rolling out 75-month terms nationwide starting today. The company previously had conducted a pilot program.
Earlier this week, CEO Bernard Silverstone indicated Ford Credit had been somewhat reluctant to extend terms on new-vehicle loans to 75 months.
“Clearly, we would prefer customers to finance shorter terms,” he said during the company’s investor day presentation on Monday. “However, we also watch market trends.”
He added: “We don’t expect [75-month terms] to be a large part of our portfolio.”
Ford Credit was the nation's second-largest new-vehicle lender in the second quarter of 2014, behind Toyota Financial Services, according to Experian Automotive.
Pricey cars, low payments
The average loan term is increasing industrywide. Longer terms, coupled with today’s low interest rates, enable customers to buy pricier cars while keeping monthly payments affordable, analysts say. Longer-term loans have also helped support the steady rise in U.S. light-vehicle sales.
According to Experian Automotive, the average term for a new-vehicle loan was 66 months in the second quarter of 2014, up from 65 months a year earlier. Used-car loans were flat at an average of 61 months. For new vehicles and used cars each, loans with terms from 73 to 84 months were the fastest-growing category, Experian Automotive said.
Silverstone said Ford Credit’s average term for a new-vehicle loan, at 62 to 63 months, has “hardly moved.”
Lenders worry that longer loans mean customers are more likely to have negative equity at trade-in time -- that is, customers will owe more on a trade-in vehicle than it’s worth.
That will make it harder for the customer to buy a new vehicle if he or she has to borrow more to cover the negative equity. Loans inflated to fold in negative equity also increase the potential size of the loss for the lender if the loan goes bad, since the loan is bigger relative to the value of the vehicle purchased.
In August, Mark Kaczynski, president of Nissan Motor Acceptance Corp., said the company has stuck with a policy it launched in 2012, not to offer loans beyond 75 months.
Ford Credit’s Silverstone said this week: “It’s a reality; customers are looking for more extended terms.”