How much consumer debt is too much? The industry appears determined to find out.
The average term for a car loan has grown to a record 63 months. According to one estimate, 30 percent of all car buyers owe more on their trade-in than it is worth.
Some independent banks happily promote ultralong-term loans. But captive lending operations should beware of that trend.
Some argue that it's up to the consumer to decide how much debt is enough.
But long-term loans can cause serious headaches. A loan of 72 months or 84 months discourages consumers from re-entering the market.
And if they do buy another new car or truck, they will find themselves underwater on their old loan. According to Edmunds.com, vehicle buyers now roll an average of $3,700 in old debt into their next purchase.
The result is a downward credit spiral that puts the consumer deeply in debt. Both Ford Credit and General Motors Acceptance Corp. are trying to limit 72-month loans. Ford Credit, for example, is limiting them to customers with solid credit. We think that's sensible.
A flat ban on long-term loans wouldn't make sense. And it would not make sense to blackball consumers with shaky credit. Subprime lending can be quite profitable for the canny lender.
But it's all too easy to overreach. Witness the financial losses suffered a few years ago by Ford Credit and, more recently, by Mitsubishi.
This summer, Chrysler Financial plans to roll out a new subprime loan program. Interest rates are the lowest in 40 years, and a company spokeswoman says Chrysler will approach that market cautiously.
We certainly hope so.
The prime mission for captive finance companies is to facilitate the sale of cars and trucks by extending credit to retail customers. That means making sure that consumers can afford to buy. It is shortsighted simply to pull an upside-down customer out of one hole and throw him into a deeper one with longer terms.
A captive lending operation should not chase short-term profits. Unlike some consumer banks, the captives must be in the market for the long haul.