Moving vehicle inventory requires keen negotiation skills to meet a consumer's wish list with a loan term that is acceptable. Savvy car buyers want their vehicles equipped with the latest technology, safety features and extended warranty coverage, with little to no money down. In other words, they want it all while keeping their monthly payment as low as possible.
With credit more readily available and the economy improved, there is plenty of incentive for buyers to open their checkbooks. Buyers have a pretty solid idea of what they desire in a vehicle but not necessarily when it comes to terms. Their primary focus when it comes to loan terms is getting the payment down to an affordable monthly expense. Enter the extended loan term of 72 months and longer. The average loan term a decade ago was 60 months, today the norm is 72 months, according to Bankrate.com. Helping the new and pre-owned car buyer, get more for their money, and spread it out over time, works for today's consumer.
NEW PROCESS, OLD MINDSET
While there have been many changes to cars and the car buying process over the last decade, the mindset of the consumer has remained the same. Consider the price of a car; it costs a lot more to get into a vehicle today than it once did. A luxury model sedan today costs $60,000 to $70,000 on up. A decade ago those same vehicles averaged $40,000 to $45,000. Even though this is a sizable increase in purchase price, consumers remain committed to getting the payment down to what the vehicle cost 10 years ago. One way of helping them accomplish this challenging task is through extended loans with terms greater than 60 months or through leasing, which offers the most favorable terms when it comes to lowering payment.
GrooveCar polled more than 100 of its New York region dealerships about affordability and what consumers are demanding for financing. One of the questions was which loan term is the most popular. The overwhelming response was 72 months. Nationally, according to Experian, the average loan term is 67 months for 1Q 2015, an increase of one month over 1Q 2014. Vehicle leasing remains at an all-time high as terms continue to lengthen.
The average new car will set consumers back $33,500—2.6% higher than in 2014 according to Kelley Blue Book. This is well over the sticker price of $25,000 from a decade ago. Pricier models redesigned by automakers hitting the showrooms were credited with the increase. The largest increases were trucks, according to USA Today.
Nationally, extended loan terms accounted for nearly 30% of loans, a trend that is in line with keeping payments low and a car longer. According to global source information provider, IHS, the average age of a vehicle on the road remains at nearly 12 years. With an improved economy, aging autos and favorable credit, the time to buy is now.
The premise that a car loses a quarter of its value the minute it is driven off the lot no longer holds true. Vehicles are made to last longer and are far more reliable, which is driving up their residual value and as a result, the pre-owned market is benefiting from this. Although pre-owned vehicles are definitely pricier than they used to be, but this may not be ever-lasting. Contributing factors included models holding their value, and the impact from the "Cash for Clunkers" program, previously limiting inventory. With the surge in leasing in recent years, near-new vehicles are flooding the market, thereby significantly increasing the amount of pre-owned vehicles in dealer inventory. The trend of more vehicles coming off lease and being readily available is anticipated to continue for the coming months and years.
Our dealerships found the No. 1 reason consumers choose the longer loan term was lower monthly payment. Longer terms allow consumers to spend more. Automotive News reported "Those with a more mainstream, $400-per-month target, a 72-month loan means consumers can spend an extra $4,800." Experian reported the average monthly payment on a new vehicle in 1Q 2014 was $474, in 1Q 2015 the payment went up $14, to $488. For pre-owned the average monthly payment was $352 in 1Q 2014, jumping slightly to $355 in 1Q 2015.
While the 72-month loan was the most popular extended loan term, dealers reported they are seeing numbers for 84- and 96-month loan terms climb. Here on Long Island, Two credit unions; Teachers Federal Credit Union (TFCU), with assets of over $5 billion and Nassau Educators Federal Credit Union (NEFCU), with assets over $2 billion; offer up to a 96 month loan term on new cars. This was unheard of a decade ago.
With prices remaining high for both new and used vehicles, the majority of our dealerships report the demand for extended loan term was being felt evenly in both segments. The majority found credit unions, banks and captives all are offering this option. Credit unions captured the lion's share in this category. According to a recent Forbes article, "Credit unions have increased their auto lending by nearly 30% since 2012, including a 16% increase last year (2014). Total new and used auto loans among U.S. credit unions was nearly $225 billion in the third quarter 2014 compared to $193 billion in the comparable year-earlier period."
There are critics who caution against the extended loan term offering as there are inherent risks associated with this type of loan product. Vehicles are no longer just transportation devices, but entertainment centers and with advanced tech choices, these enhancements cost money. Consumers are willing to spend what's necessary and the extended loan is helping to make it happen. So no matter what the vehicle, adhering to a finance comfort zone will leave plenty of room for entertainment between the bumpers at terms everyone can enjoy.
Frank Rinaudo is senior vice president of GrooveCar, a credit union automotive solutions provider.