Longer loan terms aren’t necessarily a threat to the auto market, but they already are trimming sales, industry experts said.
In the first quarter, more than a fourth of all new light vehicles that were financed carried loans of 73 to 84 months, data from Experian Automotive showed. The average loan term in the quarter rose to 67 months for new vehicles and 62 months for used, both records.
The appeal of those longer terms is understandable.
“If you do the math, between a 60-month loan and a 72-month [loan], it makes sense” for most consumers to go with the longer loan, Melinda Zabritski, senior director of automotive finance at Experian Automotive, said at the CU Direct Drive Lending & Marketing Conference last month. “Even if you raise the interest rate by 100 basis points, you save about $70 a month on the payment” with the longer term.
The danger comes with customers who may think “‘I’m going extend another 12 months and buy $10,000 more car than I can normally afford,’” Zabritski told Automotive News this week.
Consumers who buy more car than they would otherwise, or who trade their cars in after only a few years, could face negative equity. “That’s more of a cautionary tale,” Zabritski said.
The increase in longer term loans was apparent in several measures in Experian Automotive’s State of the Automotive Finance Market first quarter report, released this week.
Loans of 73 to 84 months, the longest terms tracked by Experian, were the fastest growing segment of the market, climbing 19 percent from a year earlier to make up 29.5 percent of new vehicles financed during the first quarter. That was the highest share since Experian started tracking auto loans in 2006.
New-vehicle loans of 61 to 72 months held the largest share of the market in the first quarter, 39.7 percent, but that was down 3 percent from a year earlier.
In their share of all new-vehicle loans, terms of 25 to 36 months and 49 to 60 months also fell from year-earlier levels. Loan terms of 37 to 48 months rose but represented only 9 percent of the market.
Used-vehicle buyers also took out the most 73- to 84-month loans on record. Loans with 73- to 84-month terms rose to 16 percent of all used-vehicle loans during the quarter, up 13 percent leap from a year earlier.
Within the 73- to 84-month loan segment, most loans last 75 months, “but that’s shifting toward 84 months,” Zabritski said at the conference.
With vehicles lasting on average more than 12 years, “there’s nothing wrong with a six- or seven-year loan,” said Steven Szakaly, chief economist for the National Automobile Dealers Association. Consumers have typically borrowed for half of their vehicles’ lifetime, he said.
“This is the outcome of increased durability and quality of vehicles,” Szakaly said. “Cars last longer. They have many more features in terms of safety and emissions compliance. That’s not a bad thing.”
But extended loan terms mean consumers purchase vehicles less often.
The market will not reach 18 million or 18.5 million new light-vehicle sales this year, Szakaly predicted, but “we could be looking at that number if people had shorter loan terms.” Instead, longer loans taken out in previous years are keeping consumers out of the market.
Szakaly projects sales of 16.9 million in 2015.
To counter the impact of those long loan terms and bring customers in more frequently, dealers and automakers are promoting leasing, Szakaly said.
Leasing on the rise
Leasing increased to a record 31.4 percent of all new vehicles financed in the quarter, up from 30.2 percent in the year-earlier period, Experian said.
The upward streak will continue until leasing eventually plateaus -- at some level, Zabritski said.
“I think we’ll see a continued gradual increase,” she said. But “I don’t know what that magical number is when it will stick.”
Leasing could make up 35 or 36 percent of all financed new vehicles this year, “but it would be very tough to get it much above that,” Szakaly said.
The average lease payment during the first quarter dropped to $405 per month from $412 a year earlier, Experian said.
Szakaly doubts the decline will last.
“Residuals will be under increasing pressure in 2016 and 2017 as vehicles come out of leases,” he said. That will put pressure on used-vehicle prices, and as a result will push lease payments higher, he said.