Industry insiders have expressed concerns over 84-month loans, but 73-76 month loans have the highest delinquency rates, according to Experian.
Of loans originated in the first half of 2014, the 60-day delinquency rate is 4.9 percent for new vehicles and 6.2 percent for used vehicles financed for 73-76 months. Those are the highest 60-day delinquency rates among new- and used-vehicle loans of 49 months and longer.
"The tendency is that if you give someone a 72-month loan, you are much more willing to make an exception and go to 75 or 76 months," said Karl Kruppa, senior automotive sales consultant for Experian.
A dealer may ask the lender to extend the loan a few months to keep the monthly payment low enough while still adding a service contract, for example, Kruppa said. Lenders are less likely to allow those exceptions on 84-month loans. They want 84-month loan borrowers to fully qualify, he said.
The new-vehicle delinquency rate is only 1.3 percent for 77-84 month loans and 1.69 percent for loans 85 months or longer. On the used side, the delinquency rate in the 77-84 month loan category is 1.72 percent, compared with 2.9 percent for loans 85 months or longer.
For subprime borrowers only, the delinquency rate for used vehicles is highest for 49-60 month loans at 14.8 percent. For new, the highest delinquency rate is in the 73-76 month category at 14 percent.
Higher-than-average monthly payments tend to lead to delinquencies, Kruppa said. For example, the average monthly payment for a new-vehicle loan originated in the first half of 2014 with a 77-84 month term is $510. For a 77-84 month loan that is 60 or more days delinquent, the average monthly payment is $542.
On a used-vehicle loan of 77-84 months, the average monthly payment was $423, compared with a monthly payment of $442 for a 77-84 month loan that was delinquent.
Lenders likely wouldn't extend the term to mitigate the delinquency risk, Kruppa said. Doing so could create more negative equity for the borrower.
"It's a delicate balancing act for the lenders to make sure they have the customer in an affordable payment and it's not too long of a loan term," he said.