A sign of the times: Toyota Financial Services — historically a poster child for conservative lending practices — now makes 84-month vehicle loans.
As automakers offer lower incentives and interest rates rise from record lows, the industry is relying more on long loans to reduce monthly payments in a soft new-vehicle market.
But even as the number of monthly payments rises, consumers also are paying more each month to finance new cars and trucks. That combination, industry officials and analysts warn, is driving more buyers into loan delinquency, sending some consumers downmarket and keeping other consumers out of the market altogether.
The industry "has hit a wall on how much it can extend loan maturities," says Jonathan Steinmetz, an auto industry analyst for the Morgan Stanley investment firm. Meanwhile, he says, new-vehicle costs continue to rise.
Just a few years ago, automakers' captive finance companies and other big lenders shunned loans longer than 72 months. Lenders note that longer loans are more likely to make consumers upside down, owing more on their vehicles than they are worth.
Today, though, Toyota Financial says it is battling for market share with banks, independent finance companies and credit unions. Those institutions began stretching loan terms in response to automakers' promotions offering 0 percent interest after the Sept. 11, 2001, terrorist attacks.
"There is demand for 84-month loans," says Toyota Financial spokeswoman Kerry Rivera. "Banks and credit unions were picking up business from our customers." Nearly 4 percent of new-vehicle loans financed through franchised dealerships are for 84 months or more, according to Power Information Network. That's up from 2.4 percent in 2004, Power says.
The Detroit 3's captives say they generally limit 84-month loans to customers with pristine credit who buy the most expensive vehicles. Rivera says Toyota Financial offers 84-month loans for new and certified used vehicles to buyers with top-tier credit.
The most common vehicle loan term is now 72 to 77.9 months, Power says. That category accounts for nearly two-fifths of all new-vehicle loans.