Longer loan terms and financing high-mileage cars are two lender strategies that are “pushing the envelope” during a time of a possible downturn in the auto finance industry, said Charles Bradley, chief executive at Consumer Portfolio Services.
The company does offer longer term loans, but generally doesn’t go past 72 months, Bradley said. The loan to-value ratio also has to be adjusted appropriately, such that the lender is not stuck with too much collateral if the borrower decides to ditch after 24 months, he added.
The draw for consumers is that by lengthening the loan, monthly payments will be lowered, Bradley explained. However, “generally speaking, it almost never turns out that way, and puts the lender in a worse position,” he added.
For example, if the monthly loan payment was going to be $400 a month, a longer term might lower the payment to $350, but dealers could sell the consumer a service contract or extended warranty and bring the payment back up to $400 a month, Bradley explained.
Used-car financing has also grown, he observed, and more lenders are willing to do a five-year term on an 80,000-mile car.
“In an average year, a car goes 15,000 miles, so that car needs to run for 150,000 miles,” he said. “It used to be that American cars didn’t even really make 100,000 miles. Now they are better, so that story holds up a little better. [But lenders do it] because it gives the dealer an advantage, and it ’s what we call pushing for paper.”
