Doomsayers are bemoaning a spike in seven-year car loans, predicting dire consequences for lenders and the national economy from trapping consumers in auto debt for so long. A recent Wall Street Journal article gave added prominence to those fears.
But while 84-month loans have risen from a small base in the aggregate, they are not climbing at all lenders across the industry. Instead, the uptick in 84-month loans seems to stem from a few confident auto financing players intent on increasing market share. Auto lenders' views on those loans — and the volume they hold in their portfolios — vary greatly depending on risk appetites, underwriting practices and alternative data policies.
Lenders who support, or at least tolerate, longer loans believe that improvements in underwriting metrics and the use of alternative data makes calculating the risk of these loans easier now than ever before. Those who avoid 84-month loans say they are bad for consumers.
Those opposed to longer loans note that a lot can happen in 84 months. Tyson Jominy, for example, had three children in that timeframe.
If he had been a car buyer at the start of that stretch, his vehicle needs would have been "radically different" from those at the end, said Jominy, vice president of data and analytics for J.D. Power. "I could get away with a two-door Jeep in the beginning" but by the end needed a minivan, he said. "If I have to wait for equity to build" to finance a new vehicle to meet those new needs, "that's a challenge."
Jominy said many consumers aren't considering the implications of an 84-month loan when they sign one — only the monthly payment it affords. Seven years is "longer than some people's marriages," he said.