The growth in the popularity of extended term vehicle loans (ETL) has been beneficial to sustaining continued growth in car sales over the last few years. Dealers facing diminishing profit margins have witnessed a growth in sales thanks to the growing popularity of ETLs. Consumers have taken to using extended term financing to keep monthly payments low or upgrade their vehicle while keeping monthly costs steady.
But extending vehicle loans has started to create a new challenge for all concerned:
- Negative equity for consumers
- Longer delays between sales for dealers
- Lower return and higher risk for lenders
While ETLs have generated a positive impact for dealers in the short term, they also come at the expense of keeping consumers out of the market for longer periods of time. This negative impact over time could have far more dire consequences for dealers than any benefit generated by ETLs.
Retention has always been a challenge for dealers. ETLs have created a new barrier to retention by impacting the sales cycle. Whereas in the past, with loans averaging 5 years, dealers could routinely count on customers to break their loans after 4 years, with the average loan term now exceeding 6 years, dealers are facing longer wait times between consumer purchases. Needless to say, dealers can ill afford the potential drop in sales which the increased wait times represent.