Seven-year car loan is hot favourite among few still shopping for automobiles

In the last full week of March in the US, 23% of new-vehicle buyers took out 84-month loans to finance their purchase.
By : Bloomberg
| Updated on: 04 Apr 2020, 08:37 AM
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose. (REUTERS)
File photo used for representational purpose.

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.

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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."

First Published Date: 04 Apr 2020, 08:37 AM IST
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