Why 1 Ark. CU Has Gone To 96-Month Auto Term
Arkansas Federal Credit Union has joined a handful of financial institutions across the country in "making cars more affordable" by offering 96-month auto financing.
The $364-million credit union, which serves 58,000 members worldwide, is among only a handful of lenders that offer the eight-year term to compete with leasing business and allow consumers to purchase vehicles that they couldn't otherwise afford.
"Who doesn't want more car than they can afford?" said Hank C. Klein, President/CEO of AFCU. "You see the car you want, see the price and find out what the payments are going to be. Then you choose the stripped down model."
Making Cars Affordable
Klein said by stretching the payments over an extended period of time makes that dream car attainable.
"We feel this new auto loan option gives our members the freedom to choose the type of car they want and the monthly payment they can afford without having to resort to a lease," he said. "The fact is that it makes cars more affordable."
Besides, Klein added, the latest auto financing option adds only one more year onto its 84-month loan, introduced six years ago, and a 72-month loan that he first introduced at a previous job in 1986 and again at AFCU in 1987 when he took over the top spot.
"GMAC and Ford Motor Company just started doing (72-month loans) this year," he noted.
With the recent rapid increase in the cost of vehicles, longer term financing is becoming an attractive option, he said. Klein agreed the longer-term loans do come with risks and have been met with some skepticism, but said that to date the credit union hasn't experienced a downside.
He reported that the 84-month loans make up the largest portion of new car financing in the Arkansas Federal's loan portfolio. Moreover, he added, the 84-month paper represents the smallest amount of charge-offs. "Our charge-off rate for five-year loans is .17," he said. "For six-year loans, it's .29."
And for its seven-year loans, the charge-off amount is .09 percent, he said. "That's because they can afford the monthly payments and don't turn their cars in," Klein said.
But what about critics who say consumers shouldn't buy more vehicle than they can reasonably afford, based on their current financial status.
Klein recalled conversations with an examiner after introducing the seven-year financing.
"He said we would have to watch this very closely," Klein recalled, adding that the examiner returned days later with an article that advised against longer term auto loans, saying it was "not really good for consumers."
The reality, Klein said, is that people who lease generally end up with eight years of payments, anyway.
He cited statistics that show that 80% of consumers who have a lease end up buying their cars because of money owed for repairs or exceeding the mileage limits.
"They lease the car for three years and end up taking another five-year loan out to purchase it," he said. "That makes it an eight-year loan on something they probably didn't want to keep."
If there is a downside for members who choose the 96-month option, he said, it's that they have to be seriously committed to their purchase.
"You really have to become married to the car," he said, adding, "But, nowadays, cars are lasting a lot longer."
No Additional Requirements
Klein said the CU doesn't tag on any additional requirements to applicants that choose the 96-month loan over the 84-month or 72-month loans.
"The pre-approval process is the same for all of them," he said, adding that unlike some of the other financial institutions that require a hefty down payment for longer term loans,
Arkansas FCU does not require any down payment. Klein added that members could choose the vehicle they want, regardless of price.