The price of cars has gone up. Arguably the quality has improved as well. Is it time to start offering an 8 Year Car Loan?
The above chart shows a comparison between financing a $50,000 new car for 5, 6, 7 and 8 years.
Assumptions
- The interest rate is what is currently advertised by America 1st Credit Union for their A+ borrowers. (Note the nice return of 5.24% on a 8 year loan compared to a 2.9% rate for 60 months. Obviously, they are charging a premium for the extra term).
- The chart assumes no down payment but assumes the customer pays tax and license.
- I’m using Edmund’s depreciation schedule for an average car for 5 years. Edmunds estimates that the value drops 11% as the car is driven off the lot, 25% the 1st year and is valued at 37% of the purchase price after 5 years. I’m guessing on the depreciation for years 5, 6 and 7.
Benefits of Offering
- A credit union may, if done well, make a lot more money at the 5.24% compared to the 2.9%.
- Members like the lower payments and may be able to afford a high quality car (possibly one that depreciates at a slower than average rate).
Cons
- Bank Examiners will hate them.
- The charge off rate, everything else being equal, will be higher.
Recommendations if you decide to offer an 8 Year Auto Loan
- Charge a sufficient premium to cover the increase in charge offs.
- Loan decisions should consider down payment, credit rating, the customer’s intended use of the car, how long the member intends to keep the car and the customers willingness to garage, take care of and love their car. Plug that into your modeling.
