Lengthening loan terms get brokers', banks' attention

The best handicappers of the U.S. market may be the folks lining up to buy dealerships. They place bets in the form of the multiples of earnings they're prepared to pay for stores.

"The goodwill numbers people are willing to pay have probably peaked," says broker Mark Johnson. "If you buy a store, you want to be able to forecast growth. That's how you get the multiple to work for you."

You'll offer, say, seven times earnings, he says, if you believe the rising market means you are effectively getting the dealership for five times earnings.

But with the SAAR at a "terminal position," as Johnson puts it, you can't forecast growth for a store that dominates its market area.

"The reason we think the SAAR will flatten out is the extension of loan terms," he says. "Banks are already positioning themselves for credit defaults because of negative equity. When you lengthen loans it just gets out of control. It's not going to be the economy that slows sales, it's going to be all the negative equity. You're not going to be able to get people financed.?"

Experian's Melinda Zabritski says the average new-car loan is 66 months, compared to 62 in 2008. The fastest growing category is 73 to 84 months. It has gone from 20 percent of new-car loans a year ago to 26 percent.

"As [interest] rates go up, we'll see more people in longer term loans," Zabritski says.

And. lately, she has also noted some subvention of 84-month loans.

But as for market growth, well, Zabritski says there wouldn't be nearly so much without those longer loans and the lower payments they make possible.

You can reach Richard Johnson at rjohnson@crain.com

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