As the price of vehicles pushes upward and household income stagnates, it’s not all that surprising that new-car shoppers are increasingly looking not to traditional 60-month loans, or 72-month ones, but to the longest 84-month loans.
According to Experian Automotive, this year the length of the average automotive loan reached 66 months for the first time, and loans in the 73-to-84-month category already made up nearly 25 percent of the auto-loan market as of the first quarter of this year. That’s up from less than 20 percent just a year earlier.
In recent years, automakers haven’t directly embraced this trend, however, until now. Beginning back in October, Chrysler started adding 84-month financing, through its Chrysler Capital affiliate.
The deal, as of this past month, applied to the 2015 Chrysler 200, as well as the 2015 Dodge Dart, 2015 Dodge Grand Caravan, and the 2014 and 2015 Chrysler Town & Country, as well as 2014-model-year versions of the Jeep Compass and Patriot. Currently we found dealers applying this to other models, like the Fiat 500L, but Chrysler Capital didn’t provide us a complete list of vehicles covered.
Not a strategy to reach out to the subprime set
Laurie Kight, of Chrysler Capital, confirmed that the program was launched in October, and it’s intended to supplement other APR incentive options. And to disspell a popular misconception, moving from a 72-month to 84-month loan term doesn’t necessarily mean that buyers have a worse credit record or are more likely to default.
“The program is for prime applicants and is not being utilized to finance subprime customers in longer term loans,” Kight noted.
This is the first time a major U.S. mainstream automaker has offered 84-month financing since the 2008 bank bailout and its aftermath, involving an industry-wide pullback on consumer credit (and widespread affects on auto sales).
It should be noted that Chrysler Capital is not actually a ‘captive finance’ company, under ownership and control of the automaker, in the way that GMAC was an arm of GM prior to its 2009 bankruptcy, or in the way that GM Financial or Ford Credit function for those automakers now. Santander Consumer USA operates as Chrysler Capital under a private-label agreement.
This isn't the first time for 'factory' 84-month offers
Prior to 2009, a number of automakers’ captive-finance operations had dabbled with 84-month loans. Toyota offered 84-month financing on some vehicles; so did GMAC, on a limited basis. And Ford Credit, which did a small U.S. pilot offer of 84-monthy financing “many years ago,” according to the company.
Neither Ford Credit nor GM Financial have any plans to offer 84-month financing in the near future.
Money and car keys
Generally, the upside of a longer auto loan is that your monthly payments are lower. However the downside is that you’ll be paying more in interest, and you run the risk of being ‘upside down’—of having paid less than the vehicle has depreciated—especially if you choose to sell it in the first two or three years.
84 month isn't quite the norm
Most 84-month loans are currently written by banks, credit unions, and other finance companies. Why are automakers steering away from ‘official’ 84-month new-car loans? Perhaps it’s that those who keep their cars longer are less brand-loyal. There’s also the matter that dealerships are relying more on accessories and add-ons for sales revenue, and lenders aren’t typically as lenient on what’s covered for those longer loan—again for ‘upside down’ concerns. And there's the question of whether consumers might walk away from expensive repairs—and their loan—after their warranty expires. While the latter hasn't proven true in any significant numbers yet, the other two could prove some serious issues for automakers as 84-month loans catch on even more.
On the flip side, there are signs that lenders do like long loan—because they make more on interest, of course; but also because it might actually make it easier for consumers to keep with loan payments when times get tougher.
According to Experian Automotive, both 30- and 60-day delinquencies were up in the third quarter of 2014; and 60-day delinquencies were up a significant 8.6 percent versus the same period in 2013. That’s a trend that doesn’t directly pertain to auto loan lengths, but to the industry’s risk tolerance in general.
Loans might be getting longer, but not riskier
There are also some indicators that the overall level of risk in auto loans might not be rising at all. The percentage of new-vehicle loans going to buyers with ‘subprime’ credit scores has been on the decline, according to reports. And while loans to ‘deep subprime’ shoppers—those with the worst credit ratings, and likely foreclosures or repossessions in their past—grew slightly in the last quarter up to nearly four percent of the market, so-called ‘super-prime’ loans—from those with the highest credit ratings—actually rose as well, to nearly 21 percent.
Are you more likely to push to a longer loan length with your next vehicle purchase, and are you more likely to get an 84-month loan through ‘official’ channels? Tell us why, and be sure to browse our Auto Loan Guide.