Ford Motor Credit Co. doesn’t really like the rise in loan terms to as much as 84 months in the U.S., but the trend probably isn’t so damaging that the auto finance industry needs to clamp down drastically on longer terms.
That was the implication of remarks by CFO Marion Harris in a conference call Thursday for analysts and investors. Ford Credit hasn’t relied on longer-term loans to the same extent as the industry as a whole.
Consumers have been turning to longer loans -- or to leases -- to offset higher transaction prices and keep monthly payments affordable. The trend isn’t limited to the U.S.
“In Canada, they are probably years ahead of us in the financing trends. They do 96-month financing like we do 84-month financing here,” Harris said.
“To date, it has not affected the market equation in Canada, so there’s probably room to run” for long loans in the U.S., too, he said. “But these are not positive trends for the industry.”
So far, so good
He acknowledged that long loans make negative equity an issue in Canada. Longer loan terms make it more likely a borrower will owe more on his or her trade-in than the vehicle is worth, and that’s already a problem in the U.S., analysts said. But Harris said that so far, markets could sustain the longer loans.
Ford Credit added 84-month loans to its offerings a year ago. At the time, it said that 84-month loans would be a very limited part of its business, based on what it had learned from a pilot program.
For 2016, Ford Credit said loans of 73 months or more made up 4 percent of its retail contracts, unchanged from 2015. That’s up from just 1 percent in 2014 and zero in 2013 but well below the industry average.
Industrywide, loans of 73 to 84 months made up 32 percent of new-vehicle originations in the fourth quarter, according to Experian Automotive, up from 29 percent a year earlier.
Used-car price forecast
The trend to longer loans is taking place at the same time used-car values are falling, largely because of big increases in the supply of off-lease vehicles. That decline magnifies the negative equity problem, analysts said.
Ford Credit lowered its outlook for used-car values twice in 2016, company officials said. The first time was because the industrywide decline in used-vehicle prices was affecting trucks as well as cars, to a greater extent than Ford Credit assumed.
The second time was because the overall industry decline dragged down values for Ford vehicles more than expected.
Harris said Ford Credit’s lower forecast affects used-vehicle values through 2019. Before lowering its expectations in 2016, he said, “We weren’t fully incorporating what was happening to [the] broader industry.”