Toyota’s 7-Year Loans Offer Reward, Risk

Toyota’s 7-Year Loans Offer Reward, Risk

By Michelle Krebs February 11, 2008

Toyota has begun offering customers 84-month loans on new cars to help dealers sell cars during the current economic downturn, an initiative that has some upside potential but also some risk for Toyota, said Joe Spina, Edmunds.com’s senior manager of remarketing.

“If Toyota Financial Services indeed offers these loans to customers with high credit scores and doesn’t do many 84-month loans as a percentage of its loan portfolio, then the risk of credit loss is low,” said Spina.

But, he added, “The risk with an 84-month loan is that customers may be purchasing a vehicle they really cannot afford. That could put them upside-down in the loan for longer. Then the loans become a tool that perpetuates negative equity financing.”

Seven-year loans are unusually long; they were introduced into the market only a few years ago. However, automakers are turning to methods other than cash rebates to buoy slumping sales. Longer-term loans are among those.

George Borst, chief executive of Toyota Financial Services, said at a financial-services conference in San Francisco the company started offering seven-year car loans in late summer, the Wall Street Journal reported.

The loans carry slightly higher interest rates than 72-month deals; the Wall Street Journal said rates range from 6.9 to 7.59 percent for 84-month loans, compared with 5.85 to 6.84 percent for 72-month financing, based on surveying dealers.

Borst told the conference the captive finance company started making the longer loans when it saw it was losing the business to other non–auto company lenders. Since then the loans have grown to represent 4 percent of all cars financed by Toyota Financial Services. Borst predicted the 84-month loans will rise to represent 5 percent of the company's business.

“The 84-month loans make Toyota Financial Services competitive with other institutions that already offer them and prevent Toyota’s customers from going elsewhere for longer loan terms,” Edmunds’ Spina said.

Spina noted competition for the captive lenders is fierce from non–auto company institutions, including banks, which have better credit ratings so they can borrow money at lower rates and then pass the savings on to the consumer. “Credit unions are a major threat because they operate under a favorable tax structure and are not working to earn a profit,” said Spina. “So they can pass savings on to the consumer as well.”

However, dissatisfied customers of the long loans are a risk. If a customer is upside-down in a loan longer than they want or expect, this would strain the relationship between the dealers and consumers who want to trade their vehicle during the course of the loan, Spina said.

“It is important to ensure dealers are structuring deals that benefit their customers,” he said.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.