Auto loans come in all shapes and sizes in order to accommodate the budgetary goals of members. In an effort to meet these needs, credit unions have found it necessary to provide extended loan options. A decade ago the average auto loan remained fixed at 60 months. However, this has changed with the average loan term for new vehicles at 68 months and 66 months for pre-owned, as reported by Experian Automotive. With that in mind, credit unions remain committed to providing this option to members as it allows them to be competitive in the marketplace. The average loan term is expected to climb as prices of vehicles continue to rise. Meanwhile, consumers look toward capping monthly payments at a threshold they are comfortable with.
The incentive for extended loan terms lies with a person’s perception of what they can afford each month, rather than how much they will be paying over the life of the loan. Rate alone is not as strong a consideration as staying under a desired amount in the consumer’s eyes. In 2015, the average monthly payment on a new car loan was $483; a year later, it’s $493 – up by 2%. Francis Collins, SVP for Teachers Federal Credit Union in Hauppauge, N.Y., has found, “Offering a flexible long term payment plan is beneficial to those members who are working on a tight monthly budget.” As car loans continue to slide past the five-year mark, credit unions realize obtaining a good interest rate, and a reasonable monthly payment, is a goal they must meet for members.
The ability to finance a vehicle that would have been out of reach in a five-year payment plan has created the need to push loans out further. Vehicle costs continue to rise, as does the appetite for more technology and features. Experian Automotive reports the average amount financed on a new vehicle is $29,551. According to the Bureau of National Statistics, this is up by 25% in the last decade, when the average cost of a vehicle in 2006 was $23,629. Chuck Price, vice president of lending for NEFCU in Westbury, N.Y., found, “Longer loan terms allow members to purchase more expensive vehicles by making the payments more affordable.”
Auto dealers want to meet the consumer’s desire to get into more of a vehicle for less money. Credit unions meeting this demand will need to stay competitive at the point of sale. By offering a niche product, individuals who want to purchase a vehicle, instead of lease, are now able to benefit from extended loan term offerings. “As prices and ultimately rates rise, the need for such an offering will continue and the average loan term will continue to stretch out. This is just one component of the auto loan options we offer our members,” Price explained. “At the present time we plan to continue in the same fashion.”
According to Experian, the 68-month extended car loan is the longest in history since it started tracking in 2006. Dealers are able to benefit from these offerings as well because of the ability to place more financing with credit unions offering extended loan terms. This puts the credit union in the arena with banks and captives.
While credit unions are looking to attract new members shopping for extended loan terms, Credit unions need to be diligent with underwriting and monitoring their portfolio to ensure it’s performing as expected. Collins noted that finding balance in “creating a pricing structure that drives volume and acceptable profitability results,” is the key to long-term success. Balancing members’ desire to get into a more expensive car while also ensuring defaults remain low puts pressure on the lending department. “While higher deficiency balances are likely in the event of a default, we haven’t realized significant enough volume to change our strategy. We do not see a discernible difference in performance at longer terms when compared to more traditional maturities,” Price remarked.
Credit unions that offer this product have done so for some time now and are comfortable with the rates and terms they offer on extended loans as they have performed well. Many remain conservative on their underwriting, as they are still able to compete and participate in the market by offering a product some of their members need. Regular examination of the performance of these loans will ensure credit unions are meeting profitability standards.
Indira Khan is vice president of Credit Union Relations for GrooveCar Inc. She can be reached at 631-454-7500 Ext. 120 or ikhan@groovecar.com.
