Seven-year car loan is hot favourite among few still shopping for automobiles
U.S. auto sales just crashed to the slowest pace in a decade. But among those few consumers still buying cars, one product is seeing unusually high demand: the seven-year loan.
In the last full week of March, 23% of new-vehicle buyers took out 84-month loans to finance their purchase, Joe Spak, an analyst at RBC Capital Markets, said in a report Friday that cited data from J.D. Power. Prior to the coronavirus crisis, loans that long were only 7 to 8% of the mix.
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General Motors Co., Fiat Chrysler Automobiles NV and Hyundai Motor Co. have all offered no-interest financing for 84 months to certain buyers as a way to buoy sales in the midst of what is almost certainly a recession. While stretching out the loan term helps consumers afford more vehicle than they might otherwise, the strategy isn’t without risk.
With longer-term loans, borrowers face greater risk of owing more than what their vehicle is actually worth. Consumers in this position -- referred to as negative equity -- are likely to take longer to re-enter the auto market.
Long-term loans are “hugely beneficial to keeping margins high throughout the automotive value chain," Spak said. “However, it is not without potential repercussion down the road. The longer a loan goes out, the more likely negative equity is to build, which could delay or hinder a return to the market years later."