Extending Loan Terms Attract Subprime Borrowers

FORT WORTH, Texas — As the prices of motorcycles increase and the Federal Reserve raises interest rates, loan terms are on an upward trajectory to potentially 84 months, attendees learned during a presentation on credit performance trends at PowerSports Finance 2018.

“From 2009 to the present, the average loan term has gone up from 60 to 72 plus months,” said Maurice Salter, president and chief executive of MotoLease. “While that does create a lower monthly payment for borrowers, you also have to remember that it creates a longer period of riders holding the vehicle. So, it’s important to acknowledge that whatever we do, longer financing terms seem to be moving upward, and I’m assuming the next year or two it’ll be at 84 months as the high end of most financing.”

According to data from the Consumer Finance Protection Bureau, the percentage share of auto loans with terms greater than five years has increased since 2009, with six-year loan terms climbing to about 40% from about 25%. It’s harder to find data directly related to powersports, but “there are a lot of similarities [with auto], enough to make some assumptions,” Salter added.

Subprime consumers are more attracted to longer loan terms due to the smaller monthly payments, but there’s also the added chance that consumers will default on their loans. According to the CFPB, default rates on six-year loan terms increased to about 2.5%, compared with default rates of about 1% for five-year terms in 2015. The risk is there for lenders, but there are methods to mitigate default rates, said Don Hummer Jr., president and chief executive of ThunderRoad Financial.

“Some of the ways that we have utilized to stop the higher default rates is an equity position with the customer,” Hummer said. “A lot of times we’re saying to dealers that we need some more down on this deal, we need an additional co-buyer or co-signer, or something along those lines. What we’re trying to do is stop this type of default rate and get it to balance out with what our expected portfolio yield is.”

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