Auto loan lengths creep up, ‘performing well'

Customers have been taking out longer auto loans, but the increased time until maturity doesn't appear to be a concern for investors.

TransUnion found the average loan term stood at 70 months in the year ending June 30, compared with 69.1 months for the year ending in the second quarter of 2019. (TransUnion's quarterly origination data runs three months behind to provide a more complete picture.)

"I don't think that that's really a dramatic shift," Satyan Merchant, TransUnion senior vice president of auto financial services, told Automotive News. He said new-vehicle loan lengths rose to 71 during summer 2020 but attributed that to favorable captive lender incentives.

But the average used-vehicle loan in the second quarter ran 65.9 months, exceeding the levels during that period in 2020 and in 2019, Experian reported. The proportion of 73-month or longer terms on used-car loans has grown by 2 percentage points each year between the second quarters of 2019 and 2021, reaching 23 percent this year.

TransUnion's trailing 12-month data found the average used-vehicle loan rose from 64 months in the second quarter of 2019 to 66 months in the second quarter of this year.

"That has extended," Merchant said. But he pointed out used-vehicle loan durations still ran behind new-vehicle terms.

Amy Martin, director of structured finance at S&P Global, said 84-month loans originated during the COVID-19 pandemic haven't resulted in significant losses for the creditors.

"So far they seem to be performing very well," she told the Auto Finance Summit on Oct. 29. "Everything's performing well."

Merchant had a similar assessment of longer loans.

"They continue to be solid," he said.

Martin and S&P Global in 2019 observed a trend toward longer new- and used-vehicle loans, noting that year also marked the first time an automaker's captive finance company — Toyota Motor Credit Corp. — sold a securitized bundle of loans containing 84-month terms. Toyota Credit was allowed to fill up to 15 percent of the pool with 84-month debt.

Now, Martin told the conference, both Ford Credit and GM Financial were incorporating 84-month auto loans into debt packages sold to investors. However, this remained less than 10 percent of those debt pools, she said.

Nicky Dang, associate managing director of structured finance at Moody's, said captives carrying 84-month loans on their books wasn't a new development. But until recently, the debt hadn't reached the point where it could be sold to investors.

"They just accumulated the mass, and also significant performance data, to start including them in the securitization platforms," she told Automotive News in November.

Martin said her analysis of noncaptive 84-month loans found they produced four times the losses seen in 60-month loans. However, this was relative, she said: If 60-month loans had a 0.5 percent loss rate, a loss rate four times that amount would be 2 percent — still a prime level of performance.

"If it's priced appropriately, it could be a very profitable line of business," Martin said.

Dang also noted loans typically ended far sooner than their maturity dates, averaging in the two- to three-year range because of prepayments.

GM Financial North American Operations President Kyle Birch observed during another Auto Finance Summit session that a 60-month loan used to be long for the industry. Now, loans are often 72 months, and could be even longer. But he said the longer maturities combined with low interest rates helped preserve affordability.

"It gives people the capability to buy the vehicle that they want," Birch told the conference Oct. 28.

Birch was joined on the panel by representatives from two other major auto lenders. Wells Fargo Auto head Tanya Sanders said her bank didn't write 84- or 96-month terms, though it monitored them. U.S. Bank Dealer Services CFO Dan Brogan said his company approved such terms, though not "to everybody."

Brogan noted vehicles last longer than in the past, making longer loans more viable.

"We're more confident that the collateral will hold its value longer-term as well," he said.

Birch described longer loans as a necessity in the market. Though 84-month loans didn't represent a large portion of its business, GM recognized it had to compete, he said.

"There're a lot of lenders doing 75 [months] now, instead of 72."

Merchant said he felt increasing vehicle prices didn't reflect irresponsible consumer spending, just a lack of inventory. Loan terms were a way to give consumers relief, according to Merchant, who during the interview also said interest rates were reaching a floor.

"I do think that lenders are trying to do what they can to help manage that monthly payment by maybe extending out a little bit," he said.