84-month auto loans gain in popularity

Editor's note: This article has been updated to correct the spelling of Sam D'Arc, COO of Zeigler Auto Group.

Eighty-four-month auto loans have soared in popularity among new vehicles and more than doubled on used vehicles over the past five years, credit bureau data show.

As of the third quarter of 2022, one-fifth of all new-vehicle borrowers and one-tenth of all used-vehicle borrowers were committing to seven years of debt on their vehicle, Experian said.

In the third quarter of 2018, only 11 percent of new-vehicle borrowers and 4.1 percent of used-vehicle borrowers were on the hook for 84 months, according to Experian. By the third quarter of 2022, 19 percent of new-vehicle debt and 11 percent of used-vehicle loans ran seven years. Another 1 percent of new-vehicle and 0.3 percent of used-vehicle loans during the third quarter of 2018 had even longer terms. Five years later, those proportions had grown to 1.8 percent for new vehicles and 0.9 percent for used models.

TransUnion and S&P Global Mobility report a similar trend. Twelve percent of new-vehicle and 5.1 percent of used-vehicle loans ran 84 months or longer in the third quarter of 2018. Five years later, 22 percent of financed new vehicles and 11 percent of financed used models would take seven years to pay off.

"It's insane," Headquarter Hyundai Finance Director Jasmine Figueroa said when asked if her area had seen growth in 84-month loans. Figueroa, whose store is part of the Headquarter Automotive group, described 60 to 70 percent of auto loans carrying 84-month terms.

"And it's just due to the fact that the customer is asking for it," Figueroa said Jan. 3. Consumers are requesting " 'the longest term possible' " as a means of lowering their monthly payment, she said.

Figueroa said the 84-month phenomenon spans new and used vehicles and borrowers with good and bad credit.

She said some customers even arrive with 96-month preapprovals, though her company is able to get them into an 84-month loan with a better interest rate.

"I'm waiting for someone to tell me they have a 10-year loan on their car," she said.

Edmunds Director of Insights Ivan Drury wrote Nov. 7 that if it weren't for 36- and 48-month loan incentives "we'd see even a more aggressive shift" in new-vehicle consumers adopting terms of 60 months or longer. As used vehicles lack significant incentives, "72+ month terms are the norm and 84-month financing has seen a double-digit penetration rate for over a year," he wrote.

Drury encouraged caution on lengthy used-vehicle loans.

"Interest rates are high regardless and you have to be very committed to financing a vehicle much deeper into its usefulness life cycle if it is already 4 or 5 years old," he wrote.

In December, he predicted lengthy loans would remain a trend in 2023 in response to rising interest rates.

This year's "car-buying landscape looks favorable from an increase in inventories, but with more rate hikes planned for 2023, 84-month loans are here to stay," Drury wrote.

Sam D'Arc, COO of Zeigler Auto Group, called 84-month loans one of Zeigler Auto's mechanisms for reducing a customer's monthly payment. However, he said, the group was trying to steer customers away from seven-year loans.

"Ultimately, 84 months in no way serves the customer," D'Arc told Automotive News on Nov. 30.

D'Arc said customers who visit Zeigler with an existing 84-month loan haven't posed a negative equity issue yet because of the hot vehicle market, but he anticipated those loans would eventually hinder customers' power to use those models as trade-ins.

"You have to guess that it'll be a challenge going down the road," he said.

Zeigler would give customers a better experience by ensuring they could trade into a new vehicle after a few years, D'Arc said. He said the group would rather see monthly payment affordability addressed by more leasing options for new and used vehicles.

Zeigler Auto, of Kalamazoo, Mich., ranks No. 44 on Automotive News' list of the top 150 dealership groups based in the U.S., with retail sales of 20,698 new vehicles in 2021.

Lenders at the Auto Finance Summit this fall had mixed opinions on the merit of an 84-month loan.

"We don't do 84-month at Wells Fargo," Wells Fargo Auto head Tanya Sanders told the conference.

Sanders said her bank constantly studies that duration. But it wasn't comfortable adding that new risk at a point where used-vehicle values have been declining and customers face cash-flow stresses, she said.

Wells Fargo would continue to examine the topic, but "it's not what we do today," Sanders said.

Chuck Jones, COO of Truist Dealer Financial Services, told the summit his bank had offered 84-month auto loans for years.

"We don't use that to fit a payment," he said.

Instead, Truist offered them as a "lease fighter" because the bank doesn't have an auto leasing business, he said.

Jones also noted the extended terms originated at SunTrust, the bank that merged with BB&T to become Truist in 2019. SunTrust had a client base with significant disposable income, he said.

Truist has also found 84-month debt to be "really well-performing loans," Jones said.

Tim Owens, a consumer vehicle lending executive at Bank of America, called his bank a "late entry into that game," one that had only offered 84-month loans for about six months. It was only around 3 percent of Bank of America's portfolio, compared to what he described as a 23 percent proportion in the market.

"We're not really doing it for those that are stretching for affordability," he said. It was an option for qualified customers, he said.

Jim Manelis, head of strategic alliances for Chase Auto, said Chase had offered 84-month loans for "a little bit of time," but it remained rare.

"We don't do a ton of it," Manelis said. "We definitely use it sparingly as it is appropriate."

As Jones indicated, longer debt might be less risky than it seems.

Nonprime consumers were more likely to pay 84-month loans than 72-month loans, according to Open Lending, which recently announced it had begun to underwrite insurance on seven-year car debt.

"It's all payment driven," Matt Roe, chief revenue officer of Open Lending, told Automotive News in September.

Open Lending is a middleman that facilitates a kind of guaranteed asset protection coverage for lenders — it arranges and underwrites policies for insurers that will reimburse creditors for the amount they were unable to recoup after a default.

The coverage gives lenders the confidence to accept more borrowers; Roe noted that Open Lending's clientele is almost entirely credit unions, which tend to be more risk-averse.

The company targets the near-prime market, and its previous limit had been 75 months. Roe said Open Lending viewed 84-month loans as a "prime term," and it believed a nonprime consumer with that long of a debt would be "really putting the lender at risk."

But rising vehicle prices pushed nonprime consumers out of the market, even when the cost was spread out over 72 months.

"It becomes painful for them," Roe said.

Roe said Open Lending analyzed TransUnion data and realized going from six to seven years on a nonprime consumer's loan was safer, that "payment is really what is driving the performance of the loan."

Interestingly, nonprime customers are better at making payments on 84-month loans then prime borrowers, Roe said.

"I don't know what it is really that makes that happen," Roe said.

He speculated it could be a result of nonprime customers being more used to uncertainty and weathering it better, or that a prime consumer who needed an 84-month loan was "stretching" financially.

Roe said he believed Open Lending's embrace of 84-month loans and other recent policy changes — the company has expanded the range of model years and payment-to-income ratios it wouldaccept — would be permanent.

He said he didn't see vehicle values dropping to a point his company would reverse course, and he pointed out how the near-prime 84-month loans outperformed prime ones.

"I think it's a permanent solution for us," he said of the extended loan terms.