Published in Automotive News June 9, 2014
What would happen if lenders made certain assumptions about asset values and took advantage of low interest rates to offer friendlier loan terms so borrowers could more easily finance purchases they wouldn't be able to afford otherwise?
One risk is another 2008, when the U.S. housing market, propped up by creative mortgages, collapsed in spectacular fashion, sending shock waves across the global economy.
Another scenario is the one now playing out in the auto market, where, despite stagnant personal incomes, the auto industry is able to command both rising sales and higher transaction prices by extending loan terms to five, six and even seven years, making monthly payments more manageable.
Auto and finance executives acknowledge that this trend has risks, namely that the abundance of extended-term financing could cause a future slowdown in the auto market as shoppers ride out longer loan terms before returning to the market.
But for now, they see that risk as limited. Executives say that strong used-car values, low interest rates and automakers' greater discipline in managing production and incentives point to a more sustainable recovery in auto sales and lending, even as consumers increasingly opt for car loans that will take more than half a decade to repay.
"There is good discipline across the industry, and everyone is doing what it takes to manage their business appropriately, and it's nothing like what we saw prerecession," said Thomas King, senior director of the J.D. Power and Associates' Power Information Network.
"There is, of course, risk for the long term," King says of the growth in extended-term loans, "but that risk in magnitude is very small."