Is Stretching the Auto Loan Term a New Trend?

Carol Anne Burger ,CreditUnions.com Writer
10/20/2003
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Tags: Auto

Credit unions try to make the new car buying experience as easy as possible but there's one thing they can't save members from experiencing at dealer showrooms: sticker shock. Face it, new cars, trucks and SUVs can be very pricey, and often, a standard four or five year car loan payment can leave members reeling. Still, they want more car, more options and a payment they are able to make.

Several credit unions have come up with a solution that meets all those requirements- the seven-year or eight-year car loan- and they've garnered some mainstream press coverage lately for doing so. A recent article in the Wall Street Journal named Navy Federal, Merrifield, Va., and Summit CU, Madison, Wisconsin as two CUs that offer these extended loans.

The WSJ story left out some salient facts and got some numbers mixed up, but officials at both CUs were glad to see a story that featured credit unions prominently.

''It's not a new kind of loan for us,'' said Maureen Maddox, VP of Marketing for Summit CU. ''As far as I can tell, we've been offering these loans for five years. And it's not just for the sub-prime member. We found there was a need for this product.''

Summit CU requires a 25% down payment for the 8-year loans and the minimum borrowed amount is $20,000. Rates are based on the member's credit history but come as low as 6.50% and there are no prepayment penalties. ''Most of these are for more expensive vehicles and it makes for a lower monthly payment,'' said Maddox, who likened it to the amortization of a mortgage. ''These cars also hold their value and we find that people turn them over sooner than the full term, but it's not true that the loans typically go ''underwater'' (the loan amount is higher than the car's value). Out of Summit's 5,000-car loan portfolio, there are just 20 eight-year loans on the books. ''It's been a sleeper for us, but for some members, it's the right fit.''

''The percentage increase of these loans surprised me,'' said Lou Jennings, executive VP of lending at Navy Federal. ''We put a floor on these loans- $30,000 and up, so we tend to get the higher quality cars, and we look at the credit history of members, particularly with us.'' Making car loans against heavily advertised 0% financing can be tough, he allowed, but Navy's writing about the same as last year and that's going up against the Big Three.

In the first quarter of 2003, the 72-month term was 28.8% of the portfolio, based on the number of loans, and 30.5% of the total dollar percentage of the portfolio. The 84-month term was 14.4% in the number of loans and 21.1% of the dollar percentage of the portfolio. For comparison, in the 2Q of 2002, the 84- month term was 9% of the portfolio based on number of loans; in the 3Q of 2001; it was only 7%.

''The law of large numbers is on our side,'' Jennings said. ''Historically, most of our members repay us, and we don't decline many loans, so we manage it well.'' So well, in fact, that Navy is considering an eight-year term.