When I got in the car business, 36-month loans were as long as any lender offered. Then 48 became the norm a few years later. I remember some finance companies offering 60-month loans on conversion vans, then 60 became the norm for all loans, 72-month loans today are common, and now lenders, including Ford Credit, are opening the door to seven-year financing.
I really hate to see this happen because it will make it harder for people to trade cars, some cars won’t last as long as the loan, and 84-month loans will make 72-month financing the new norm.
Ford Motor Credit Co. has become the latest auto lender to offer 84-month financing.
Ford’s captive finance arm told dealers it was adding the seven-year term earlier this month, after finishing a yearlong pilot in Ford dealerships in the western U.S., spokeswoman Margaret Mellott told Automotive News. Now 84-month loan terms are available to dealerships throughout the country.
“We’re already seeing customers in the industry financing on 84 months,” Mellott said. The long-term financing offer is an “opportunity for Ford Credit to work with them.”
Based on volume from the pilot, 84-month loans will be a small part of Ford Credit’s overall business, Mellott said.
Ford Credit’s new offer is in line with the market, data from Experian Automotive show. Terms lasting 73 to 84 months made up 29 percent of new-vehicle loans in the fourth quarter of 2015, up 12 percent compared with the year-earlier period, and 16.4 percent of used-vehicle loans, up 10.8 percent year over year.
The average loan term in the fourth quarter was 67 months for new vehicles and 63 months for used.
Consumers who finance with a captive are more brand-loyal, according to Experian Automotive. About 64 percent of consumers who finance through a captive choose the same vehicle brand for their next purchase, compared with 58 percent of consumers who finance with banks.
Santosh Viswanathan, managing partner at Willis Ford in Smyrna, Del., said he questions whether Ford Credit truly wants 84-month financing, or if the primary reason for the offers is to keep up with competition.
“Since some of the other banks gave that offering, having that offering as a placeholder may be the reason for extending loans to 84 months. I don’t know that Ford even wants to move customers to 84-month financing,” Viswanathan said.
His staff tries to avoid putting customers in long-term financing. They let customers know about long-term financing, but they also present leasing as a low monthly payment option, Viswanathan said.
On 84-month loans, “the math does not work for the customer and the dealership” because the customer “will be so far upside down” in the latter part of the term, Viswanathan said. “To encumber a customer so long in financing is not a good practice for us” as Willis Ford looks to keep customers in a shorter trade cycle, he said.
At the end of a three-year lease, there is no negative equity, he points out, and dealers can put customers in shorter trade cycles with leasing. “If you put a customer in a three-year trading cycle, you sell them two vehicles in six years, rather than one in seven years,” he said.
Mike Stanford, president of Varsity Automotive Group, which has two stores in metropolitan Detroit, says leasing is a popular option in the area. For example, at Varsity Ford in Ann Arbor, Mich., leasing makes up 60 percent of new-vehicle volume, Stanford said.
“Unless you’re going to keep the vehicle for a long, long time, most people in this market are going to go to leasing,” he said.
For states such as Texas, Stanford said, drivers put more miles on their vehicles and tend to keep the cars longer. Eighty-four month loans are another tool dealers can use for those customers who prefer a long trade cycle, he said.
A few years ago, 60-month loans had an 8 to 10 percent interest rate, Stanford said.
If a consumer is considering an 84-month loan, “now would be the equitable time to do it because interest is so low,” he said.
Ford Credit’s Mellott said the appeal of an 84-month loan term is that customers are able to purchase a vehicle with the content they want at a more reasonable price.
“We’re building experience around managing this product and the trade cycle,” Mellott said. She said she expects that customers who qualify for loans as long as 84 months will have good to excellent credit.
In the fourth quarter of 2015, the average amount financed on new vehicles was about $28,500. Assuming a 3.9% interest rate, let’s take a quick glance at the total amount paid out on various terms, including interest:
- 48 Months: $30,827.
- 60 Months: $31,415.
- 66 Months: $31,680.
- 72 Months: $31,968
- 78 Months: $32,292
- 84 Months: $32,593
In this same scenario, a 72-month loan has a $79 lower payment than a 60-month loan. If you are cutting your budget so close that $79 makes enough difference to stretch the loan out another year, rethink what you are buying.