Historically, lending terms are extended to 72 or 74 months at most, but pushing that envelope to an 84 month contract is a “fantastic alternative” to increasing indirect volume or subprime loans, according to SunTrust Banks’ Chief of Retail Credit, Tony Hejna.
Longer-term loans are one solution to the increasing competition in the auto finance industry, Hejna said during last week’s Auto Finance Risk & Compliance Summit, where he weighed in on the risks and strategies at play when it comes to extending loan terms.
When business is bracketed to prime credit quality within the traditional loan cut off of about 72 months, there is a limit to the growth volume available to auto finance market, he said. Furthermore, expanding origination targets deeper down the credit spectrum introduces residual risk into a lender’s portfolio — which means the company could have to account for residual values that don’t hold throughout the lifetime of a loan, Hejna said.
There are many differences between mortgage bonds and auto loans, but one similarity is risk layering, which often comes in tandem with every ostensibly innovative step a company tries to make, he explained. If a company wishes to increase volume by extending loan contracts, for example, then the extra 18 months or so during which the vehicle could have been charged back and re-financed is pushed back. Subsequently, that introduces the risk that those cars might not be returned with the same market value, he added.
However, originating longer loans to “zero-Fico score” consumers is an increased risk SunTrust won’t take on, Hejna said. “If you need an 84-month loan just to get the car, we don’t want to talk to you,” he said.
Therefore, SunTrust extends loan contract length for consumers who have prime credit, and high income, but prefer a longer term auto loan, Hejna said — in other words, the type of high-quality customers that SunTrust is interested in expanding into, he told AFRCS attendees.
Since the only risk is time itself (and not income, credit, etc), volume can be added with minimal additional risk, Hejna said.
