Longer Term Loans Have Value at Higher Credit Quality, Bureaus Say | Auto Finance News | Auto Finance News

Longer Term Loans Have Value at Higher Credit Quality, Bureaus Say

via Experian.com

NEW ORLEANS — While banks, captives, and financial institutions are dialing back longer term loans, these loans can still perform well with higher credit consumers, representatives from major credit bureaus said during a panel at the American Financial Services Association’s 2017 Vehicle Finance Conference yesterday.

Wells Fargo & Co., Honda Financial Services, and Consumer Portfolio Services recently signaled they’re pulling back on 72-month loan terms, citing the risk profiles. Yet, average credit scores for loans past 72 months have started to rise for the first time in several years, Melinda Zabritski, senior director at Experian, said on the panel.

Loan terms at 75 months still “perform worse” than those made at 72 months, but that could be attributed more to the type of consumer that lenders are financing, added Jason Laky, senior vice president and auto business lead at TransUnion.

“If lenders are doing it [offering longer loan terms] for the consumer who really wants the car and you match the term to the length of the ownership — [longer loan terms] are a really good thing to do,” Laky said. “But if you’re a finance manager or lender who is getting a consumer to sign on a loan they couldn’t otherwise afford, I think that’s where some of the risk is.”

Studies have shown longer loan terms work when the consumer has higher excess payment capacity in the month prior to the loan, Laky added. Consumers that borrowed close to their maximum affordability didn’t perform as well and were often pushed into the 84-month range to lower the monthly payment.

Just because a consumer has good credit doesn’t mean they don’t want a lower monthly payment, and that’s a trend that has manifested in leasing, Zabritski added.

“Leasing is over 30%, and the reason for that is the payment,” she said. “We’re seeing prime consumers increasingly lease, and that had a little bit of a negative impact and even spurred some of the subprime bubble talk because it made the loan market look more subprime than it was because the prime consumers defected and went to leasing.”

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