6-year car loans increase

Third of state’s auto buyers borrowing long

About a third of Arkansas' auto buyers are signing new-car loans with payments stretching out six years and beyond.

Nationally, 32 percent of all new-car loans this year were for 72 months or longer, according to LMC Automotive, a global automotive forecasting firm based in Westlake Village, Calif.

It's about the same percentage in Arkansas, said Steve Landers, owner of Steve Landers Toyota Scion and Steve Landers Chrysler Dodge Jeep in Little Rock.

Some lenders are now stretching out new car loans to 84 months or more, Landers said.

"A car is a depreciating item," said Landers, who added that with long-term loans the buyer may have no equity even after 48 months of payments. "My cars depreciate, [other] cars depreciate. Every car goes down in value. Don't take out an 84-month loan."

In the first six months of 2014, 73,120 new vehicles were registered in Arkansas, according to Cross-Sell, a Lexington, Ky., auto research firm. That would mean that more than 23,000, or 32 percent of the loans, would be for 72 months or longer.

The longer loans are being combined with easier credit terms and discounts from manufacturers to fuel a post-recession comeback in auto sales, analysts say.

Consumer borrowing in the U.S. jumped more than forecast in July, mostly because of an increase in auto loans. Auto sales soared in August to a 17.4 million annualized rate, the strongest since 2006, according to a report from Ward's Automotive Group.

As U.S. sales of cars and trucks have grown this year, so has the late-payment rate on auto loans.

Auto loan delinquencies increased more than 9 percent in the second quarter this year compared with the same period last year, TransUnion, a credit rating service, said Tuesday. Auto loan debt also rose for the 13th straight quarter.

Financial problems were evident in all demographic sectors, with delinquency rates and debt levels rising for all age groups, TransUnion said.

The delinquency rate, however, is only 0.95 percent, up from 0.87 percent in the second quarter of 2013.

Auto loan debt rose 4.1 percent to $17,090 in the second quarter this year, up from $16,410 in the same period last year.

Credit rating service Experian told The Associated Press that the number of auto loans made to borrowers with poor credit increased almost 13 percent in the second quarter this year nationally, compared with the second quarter last year. Borrowers with low credit scores typically have a higher likelihood of defaulting on loans.

There are some subprime borrowers -- those with credit scores below 620 -- qualifying for auto loans in Arkansas, but not that many, said Dennis Jungmeyer, president of the Arkansas Automobile Dealers Association.

Most subprime lending in the state is for older used cars, Jungmeyer said.

"The typical buyer who comes into a [new-car] dealership is looking for a new car or a late-model used car," Jungmeyer said. "It's hard to get a loan [for newer vehicles] if your credit score is that low. [New car dealers] do it some, but I would say it's the exception rather than the rule."

Lenders are taking a risk to make such subprime loans, Landers said.

"[Subprime lending] is a lucrative business," Landers said. "The last 24 months [subprime lending] got pretty aggressive on cars. But in the last four to six months, they've started tightening down again."

In Arkansas, about 15 percent of new vehicle transactions are leases, Landers said. That's slightly below the national level of 26 percent, up from 18 percent in 2008 during the recession, LMC Automotive said.

Before selling his Landers Chrysler dealership in Benton in 1995, when it was the largest Chrysler dealership in the country, 70 percent of the new car transactions were leases, Landers said.

"We just had a constant flow of [those leasing vehicles] coming back in," Landers said.

Generally, though, new car dealers don't have a lease mindset, Jungmeyer said.

"On the coasts, leasing is 30 to 40 percent of [new car business]," Jungmeyer said. "It hasn't taken off like that in Arkansas."

A Section on 09/10/2014

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