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.
