More Risk in 72-Month Terms Than in 84-Month Terms, Moody’s Says

Despite their longer term, 84-month loans are outperforming 72-month loans, according to Moody’s Analytics Senior Director and Credit Analyst Cristian deRitis.

“An 84-month [term] is kind of the outlier, it gets a lot of attention,” deRitis told Auto Finance News. “But it’s 72[-month terms] where we really see risk, and we also see that delinquency rates on the 72[-month loans] are not performing as well as some of the other products, so that caught our attention.”

In a report titled Is Auto Lending Doomed?, DeRitis analyzed data from Equifax and found that 70% of 84-month auto loans were extended to borrowers with credit scores of at least 680. Credit unions are the most common providers of 84-month-or-longer loans, but they are in a better position to offer extended terms because of their member relationships, deRitis said. Captives, meanwhile, rarely offer terms longer than 72 months.

“We saw that the 72-month term does have a higher proportion of lower credit score borrowers,” deRitis said. “And it has actually been growing over time, so that’s an indicator that that seems to be where more of the risk is flowing.”

According to the report, 72-month loans accounted for 35% of the market in 2014, up from 25% in 2010. So is auto lending doomed? Not quite, deRitis said, adding that the industry is at a tipping point.

“If we continue to extend or loosen underwriting standards from here, I think that would be a problem,” he told AFN. “It might be sustainable if some of these other tools for layering of risk are in place, but just extending to more and more borrowers would certainly be a warning sign for going too far.”