In Car Loans, a Bit More Risk: Competition, Sticker Prices Drive Longer Terms

By Jackson, Ben | American Banker, June 10, 2004 | Go to article overview

In Car Loans, a Bit More Risk: Competition, Sticker Prices Drive Longer Terms


Jackson, Ben, American Banker


At current interest rates, banks may not like making six-year car loans, but borrower demand and competition from manufacturers offering 0% financing has given them little choice.

A new study of automobile lending trends shows that with average size of a new car loan now topping $23,000, more buyers are seeking to extend their loan terms beyond five years to keep monthly payments low.

Though lenders generally frown on extended-duration loans because the rapid depreciation of cars could become a problem in the event of default -- some have scaled back their auto lending for this reason -- they say they must offer the extensions to remain competitive in today's cutthroat auto financing market.

According to Consumer Bankers Association survey of 37 large auto lenders -- which includes banks as well as the finance companies owned by car manufacturers -- 40% of car loans made in 2003 were for more than five years, versus 34% in 2002. Most of these longer loans were for six years, though some banks are making loans for as long as eight years.

The study, released last month, also said that the average size of a new car loan rose 6%, to $23,076. According to bankers, that is a big reason for borrowers' wanting longer terms -- to reduce monthly payments.

"The loan term is expanding to accommodate the price of those vehicles," said Nicholas G. Stanutz, the executive vice president of consumer credit administration at the $31 billion-asset Huntington Bancshares Inc. of Columbus, Ohio.

On the plus side, longer terms and lower monthly payments may be contributing to lower delinquencies. In 2003, 1.54% of new car loans were 30 days past due, according to the Consumer Bankers study, compared with 1.73% in 2002 and 2.50% in 2001.

Still, lenders worry that with borrowers taking longer to pay down their debt, loans could turn "upside down. …

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