Editorial: 7-year loans could eliminate sales tomorrow

Every farmer knows that even in the toughest of times, you don't eat your seed corn: Never sacrifice tomorrow's well-being to satiate today's desires.

We just wish sections of the auto industry would follow this sage advice.

Case in point: Nearly a fifth of new-vehicle loans that were originated in the third quarter stretched to 84 months, according to Experian. That's up from just 10.5 percent of new-vehicle loans as recently as 2018.

The influx of seven-year loans has brought more customers into this expensive new-vehicle market, but the drive to sell a car today could eliminate sales tomorrow.

What's driving these loans? Issues of affordability, for the most part. The average transaction price for a new vehicle in the U.S. hit a record high of $49,507 in December, up 4.9 percent — almost $2,300 — from a year earlier, according to Kelley Blue Book. At the same time, Edmunds said interest rates on new-vehicle loans ran to 6.5 percent, up from 4.1 percent in the fourth quarter of 2021.

Yes, putting consumers into seven-year loan terms because it's the only way they can afford to make payments will keep moving the metal and meeting monthly sales goals, but dealers and lenders should remember to play the long game. Lengthy loan terms put consumers underwater and keep them out of the market.

In other words, it's eating your seed corn — leaving dealers and automakers at a disadvantage tomorrow to maximize their profits today. The same thing has happened with the collapse of new-vehicle leasing, an important sales tool that keeps customers coming back at regular intervals and allows dealers to plan ahead.

Dealers and their employees need to stay focused on the future, and that may mean looking out for their customers' best interests as well as their own. Many customers would be better off in a less expensive vehicle with a shorter loan term. At the very least, sales and F&I professionals should ensure that customers know what they are getting themselves into.

Automakers should also alleviate high prices when possible by using the $7,500 credit for commercial EV leases to subvent monthly payments, improving affordability for customers and giving the industry a pipeline of used vehicles.

Only then can the industry know there will be enough seed left for tomorrow's crop of new vehicles as well as today's.