The percentage of auto loans originated in the last few months shows a distinct slant towards longer-term loans. According to data from J.D. Power's Power Information Network, 86% of auto loans originated from November 2007 to January 2008 were for terms longer than five years, with 4.2% of auto loans originated during that time period having terms of either 7 years or longer.
One reason for this focus on longer-term loans has been that automakers are looking to boost sales. Toyota recently announced that they had been making 7-year loans on their vehicles in an attempt to offer lower monthly payments. Their hope was that these lower monthly payments would help spur sales, as the lower payments made the cars seem more affordable.
The downside to this trend however is that the benefits to the individual auto buyer are only in the short term. By lowering the monthly payments, these vehicles become more affordable to the average individual. However, in the long run, this loan will likely have a negative impact when that person looks to trade the vehicle in.
According to a recent USA Today article, the average individual looks to trade in their vehicle after approximately three to four years. By this time, under a shorter-term auto loan, those individuals will have built up enough equity in the car to cover the outstanding balance of the loan. This additional equity can be put towards the down payment on their next car. If the individual had a loan with a longer term, chances are high that when they go to trade in their car, their outstanding loan balance would be greater than the equity they had built up in the car. Because of this, there is no additional equity to use as a down payment, and that person is forced to carry the additional loan balance on to their new car.
Credit Unions Help Members by Taking a Different Approach
This presents an opportunity for credit unions to step in and educate their members about appropriate auto financing strategies. According to CUDL, credit union new auto loans with maturities greater than five years comprise only 69.3% of the portfolio. This accounts for a far smaller portion than the 86% for the rest of the auto industry. The difference is that credit unions are looking to help their members manage their debt and financial standing. Rather than simply trying to direct member towards the vehicle with the largest payment they can afford, the credit union can work with the member to provide rates and terms that make the vehicle purchase an affordable option.
Credit unions have the opportunity to take a holistic approach and see how a vehicle loan can be a part of a member's complete financial standing. This can all be done without extending the term of the loan into levels where the member may be negatively impacted further down the road. This means that credit unions can help their members avoid this cycle and walk away from an auto loan in better financial shape than they would be with other financing opportunities.