The slow march toward 84-month loans is adding fuel to the debate over whether auto lending is getting too risky, possibly threatening the economy the way subprime mortgages did during the run-up to the 2008-09 financial crisis.
Auto buyers increasingly are opting to spread their payments over longer terms so they can finance higher amounts -- and thus buy pricier vehicles -- and still keep monthly payments low.
Not every auto lender is on board with seven-year loans. For example, Volvo Car Financial Services U.S., Nissan Motor Acceptance Corp. and Ford Motor Credit Co. have all said they don’t offer 84-month loans because they want customers to return to the trade cycle more often. NMAC and Volvo Car Financial have said they will go as high as 75 months.
But Toyota Financial Services has been offering 84-month loans since 2007, according to spokesman Justin Leach, though those loans account for less than 3 percent of volume.
And Ally Financial Inc. just came fully on board, rolling out 84-month loans to relatively well-qualified customers nationwide in February. CEO Jeffrey Brown said recently that Ally had “underachieved” for the past two or three years by not taking enough credit risk.
Ally spokeswoman Gina Proia told Automotive News that 84-month loans were offered in about 24 states last year. She added: “Ally is committed to offering competitive products designed to help dealers provide their customers with a variety of options that meet a range of consumer credit needs and monthly payment preferences.”
Meanwhile industry watchers continue to evaluate the economic wisdom of extra-long auto loan terms.
For example, Deputy Comptroller Darrin Benhart from the U.S. Treasury’s Office of the Comptroller of the Currency warned about “weaker underwriting standards” and longer auto loan terms at a Global Association of Risk Professionals conference last month in New York. He said current upticks in subprime auto loans and in consumer loan delinquencies pose risk down the road for the nation’s economy.
“Lenders are now extending repayment periods up to 84 months on new and used vehicles compared with the 60 months we have seen traditionally,” Benhart said. “… Let that sink in for a moment.”
However, Cristian deRitis, a senior director at Moody’s Analytics, disagrees that long-term loans are an immediate problem. He presented the topic “Is Auto Lending Doomed?” as part of the company’s Economic & Consumer Credit Briefing in New York on March 3. He concluded it is not. He said press reports are fueling fears that subprime auto lending is following the same path subprime mortgages did leading up to the 2008-09 recession -- that is, sacrificing quality for quantity
With regard to longer loans, deRitis told Automotive News last week that 84-month loans are worth keeping an eye on, but he said he isn’t too worried about them for several reasons.
First, he said, while percentage growth is high, 84-month loans are still a relatively small slice of the business. Citing data from the Equifax credit reporting agency, deRitis said that for new- and used-vehicle loans combined, 84-month loans accounted for about 3.25 percent of auto loans in October 2014 vs. about 2.25 percent in October 2008. That’s a big percent increase -- about 43 percent -- but 84-month loans still represent less than 5 percent of the market.
In addition, he said, 70 percent of 84-month loans are going to customers with credit scores higher than 680. Opinions vary, but many lenders consider credit scores above 620 to be prime.
Finally, deRitis said, credit unions are responsible for much of the growth in 84-month loans, and credit unions on average have very low delinquencies and close relationships with their members.
‘Still good scores’
According to Experian Automotive, loans with terms of 73 to 84 months accounted for about 26 percent of new-vehicle originations in the fourth quarter last year, up from 20 percent in the year-earlier period. For used-vehicles, 73-to-84-month loans accounted for about 15 percent of originations, up from about 13 percent.
Within that range, most loans are fewer than 84 months, said Melinda Zabritski, senior director for Experian Automotive. For the whole industry, the average term on new-vehicle loans was 66 months in the fourth quarter, up from 65 in the 2013 period. For used-vehicle loans, it was 62 months, up from 61.
Zabritski said average credit scores do get lower as terms get longer, but she agreed with deRitis that the average score for even the longest term category was still in the prime range.
“They are still good scores,” she said.
Jamie LaReau contributed to this report.