Lower monthly payments for customers. Higher interest for dealerships. More new-car sales, at higher prices. It’s easy to see why the long-term auto loan has become so popular with auto dealerships and customers in recent years. From a customer’s point of view, it’s a great way to drive the vehicle you want, for a lower monthly cost. And from an auto finance point of view, it’s a good way to increase interest revenue by extending the life of the auto loan.
There’s no question these loan products are growing in popularity. Experian reports the average loan term is now 68 months, or about five and a half years — and many auto finance companies are promoting 72-month loans and even 84-month loans. In fact, according to Experian, 27.5% of buyers are now financing vehicles for 73 to 84 months.
But are dealerships really making more money with long-term auto loans? And are their customers really happier? Before you steer your customers toward a 72-month or 84-month vehicle loan, check out these five reasons why it might pay more to say “no” to the latest trend in auto finance — and one alternative auto finance method that might work better.
5 Reasons to Reconsider Long-Term Auto Loans
1. Longer Sales Cycle
According to research by R.L. Polk, the average length of time drivers keep a new vehicle is around six years. Based on this number, it’s easy to see why auto loans have traditionally been limited to three- to five-year terms. After all, a buyer is more likely to trade in their vehicle for a newer model if they owe little or nothing on their previous auto loan. In contrast, a customer with a 72-month vehicle loan will have just paid off their vehicle at the six-year mark—and a driver with an 78-month vehicle loan will still have another year to go. These drivers may not be ready to return to your dealership until they have paid off their last “new” car purchase. Even then, they may want to hang onto their paid-off car a bit longer. Over time, long-term loans could prolong your sales cycle, lengthening the amount of time between transactions at your dealership, and reducing revenue from new car sales.
2. Less Time with Customers.
Beyond reducing sales, long-term auto lending could also reduce the amount of time you spend with each customer. A customer who returns every six years or so for a new vehicle (and schedules maintenance in between) will see you at the dealership more often, and remember you. Auto leasing customers visit dealerships even more often, usually trading in their vehicles every two years. However, if your customer only buys a new car once a decade, you will see them a lot less often. As such, it will be more difficult to create a positive relationship with them.
3. Unhappy Customers
On the topic of customer relationships, most dealers want the same thing: happy, satisfied, repeat customers. However, the low payments that attracted your customer to a 72-month or 84-month auto loan may not make them as happy as you might expect. Even though drivers certainly have the opportunity to review every detail of their auto loan, most don’t look at the numbers as closely as they should. As such, your customer could feel upset and even angry if they become upside-down in a loan, even if they know full well that they agreed to the loan terms. In this case, you may never hear a complaint from the disgruntled customer—in fact, you may never hear from them again at all. However, the unhappy customer is likely to tell his or her friends about their experience. The same customer might have been happier with a short-term loan, or an auto leasing arrangement.
4. Fewer Service Visits
When vehicles are new and under warranty, owners tend to take better care of them. This can mean more visits to your service and maintenance department, and increased revenue for your dealership. However, the new car feeling only lasts so long. If your customer needs service or repairs that are not covered by the warranty, or if the warranty has expired, they may be less likely to return to your dealership for service. This is especially true of customers who have less disposable income. Buyers with a 72-month or 84-month auto loan will be making monthly car payments well past the warranty period—so they may have less to spend on repairs and maintenance.
5. Missed Opportunities
At a glance, it may seem like auto lenders and dealerships are making a lot of money with long-term auto loans. But is this really the case? Let’s look at the numbers.
Let’s say your customer finances $30,000 at an interest rate of 2.63%, for a loan term of 60 months. Their monthly payment would be $534.14, and they would pay $2,048.40 in interest over the life of the loan. If they financed the same amount for a loan term of 84 months, at a higher 6.4% interest rate, their payment would be lower, at $444.03, but they would pay would pay $7,298.52 in interest over the life of the loan. That’s $5,250.12 in additional interest income.
While the additional interest is tempting, it’s important to consider the long-term cost to your dealership of offering such a loan. As mentioned above, the buyer may refrain from purchasing a new car for several years. What if, instead of paying $5,250.12 in interest over a seven-year period, your customer returned to your dealership in five years to trade in their used vehicle and take out a $40,000 loan for a new vehicle? You would have the opportunity to make money on the trade-in, the sale, and the new, higher loan amount.
Even more important, your customer might be more likely to return to your business in the long term, instead of heading elsewhere.
1 Great Alternative: Vehicle Leasing
Hey, we are an auto leasing company—you had to know this was coming. Seriously, though, there’s a reason many drivers are choosing auto leasing as an alternative auto finance method. Actually, there are several reasons.
Lower Monthly Payments. Higher Rate of Return.
With vehicle costs and payments on the rise, and depreciation escalating, a lease lets drivers put down less money upfront, make much lower monthly payments, and avoid the long-term commitment of a 72-month or 84-month auto loan. This means your customers will have more disposable income, and you will have a dependable revenue stream through auto leasing.
More Repeat Customers. Better Relationships.
Auto leasing customers are also more likely to return to your dealership. When their lease is up for renewal, they may come back to you to renew their lease, or perhaps make a new car purchase.
Better Customer Satisfaction for the Long-Term.
Customers who enjoy driving new vehicles and trading in often may enjoy the flexibility and low costs of leasing—and they won’t be locked into a long-term commitment. After fulfilling the lease terms, customers may choose to trade in their leased vehicle to enjoy driving a brand-new or gently used car once again.
More Service Opportunities
For new vehicle leasing, automobiles are under warranty, meaning drivers are more likely to come into your dealership for maintenance. And because MUSA Auto Finance offers additional insurance options, your customers whose cars aren’t under warranty won’t have to worry about repair and maintenance costs.
Find out more about vehicle leasing from MUSA Auto Finance.
Click here to find out more about the benefits of auto leasing. If you’re interested in becoming a dealer partner, please contact MUSA Auto Finance today. We look forward to serving you.