ONTARIO, Calif.-If rates tick up, terms of loans will lengthen to keep borrowers in an affordable payment, predict analysts — some of whom have spotted auto loan terms of more than 100 months.
And terms have already been moving out longer (Credit Union Journal, March 25), with the average term for new at 65 months and 61 for used-72 being the most common term today, according to the latest Experian data.
Tony Boutelle, president and CEO of CU Direct, said the trend toward lengthening term has been picking up because cars are built better and last longer. "A lot of lenders are doing 72 to 74 months, and we are seeing some go to 84, 96, and longer. The concern in going longer is that when people trade in the negative equity becomes a bigger issue. If you go 96 months you may not have positive equity in that car until five years into the loan."
A buildup of negative equity among borrowers, as was the situation pre-recession, is a growing issue that has been noted by Melinda Zabritski, senior director of automotive credit for Experian, Costa Mesa, Calf. She told Credit Union Journal that the average length of time owners are keeping their cars is not lining up, or even heading in the right direction, with the most popular loan terms today. "Will consumers really hang onto their cars longer? It does not seem like they will."
Concerns Over Delinquencies
Zabritski said the most common term for new and used cars today is 72 months, but length of ownership has come down recently, to 66 months from 68. "My real concern lies in heavy term to use. Extending term is OK when managed with the right LTV, risk-based pricing, etc. My concern is if loans with high LTVs go delinquent or the consumer trades in early without a heavy down payment, there is buildup of negative equity."
Bill Vogeney, EVP/CLO at Ent FCU, Colorado Springs, Colo., has heard of some CU lenders going out to 96 months, but says the $3.8 billion credit union is not considering that. Ent will extend credit to 84 months, but closely monitors losses on that portfolio. "The loan terms that are a little longer are the only ones you are really making any money on. Yes, losses are higher, but we are charging for that."
Vogeney, who also chairs the CUNA Lending Council warned that CUs that go to 96 months should watch that portfolio of business extremely carefully because losses can start to increase dramatically at 96 due to borrowers being upside down.
'No Big Deal'
Pete Radike, director of product management for Fiserv's lending solutions division, Brookfield, Wis., explained that what is extending term as much as the need for lower payments is cars lasting longer and consumers not being embarrassed to hang onto an older car.
"Sixty months has become a very common payment term," he said. "It's not unusual anymore and in no way considered a stigma. Consumers have gone through a number of difficult financial years and now realize they can keep their cars longer. So I have an 11-year-old-car and I go to get a new one to finance for five years-no big deal."
