HARRISBURG, Pa. — For the past three years, Pennsylvania State Employees Credit Union has offered its members a 10-year auto loan option–a term not commonly seen for a vehicle purchase.
PSECU President Gregory Smith said that the loan is typically used as an alternative to a lease for members wishing to purchase more expensive car models.
“Looking at the 10-year loan in comparison to our other auto loans showed that the 10-year category had the shortest pay off time,” Smith said. “The pay off was typically sooner than five years.”
However, long-time PSECU member Oren Spiegler opposes the credit union’s 10-year option and said that the loan is the most irresponsible loan that exists in the United States.
“I have not heard of a 10-year auto loan offered at any other financial services institution,” Spiegler said. “This product is designed to provide vehicles to borrowers which they cannot afford.”
PSECU Vice President of Lending William Zysk said that to date the loan has not increased any risk and has given members the option to purchase a larger vehicle rather than lease it.
“We only offer a 10-year equity loan, where some credit unions offer a 15-year equity loan. It’s the same principle. It’s just an extended loan,” Zysk said.
Spiegler said that never in a million years would he go for a loan like this and that he has spoken with financial advisers who say that a loan of this length would turn the borrower upside down. “Individuals of reasonable intelligence know that an automobile is a depreciating asset, and that when one takes out a loan which is highly likely to far exceed the life of that asset, they are liable to be upside down, owing thousands more dollars than the vehicle is worth when they seek to trade it in.”
Zysk stated that the delinquency rate on the 10-year auto loan is slightly better than the rate on the five-year auto loan. The 10-year delinquency rate ranges from 0.3% to 1.0% and the five-year delinquency rate ranges between 0.6% and 1.0%. The standard of credit for the 10-year loan is the same as any other auto loan PSECU offers and the average loan amount for the 10-year loan, according to Zysk, is $44,000. He said the credit union has about 750 of these 10-year loans worth $40 million.
“The industry has moved to a longer loan term since we started offering this loan product,” Zysk said. “Today there’s a drop in borrowing and people used this loan to typically purchase sport utility vehicles and trucks, and today we’re seeing less of those cars being purchased.”
Mike Schenk, CUNA senior economist, cited the G19 consumer credit study conducted by the Federal Reserve Board that showed that there has been a large increase in the average loan term for cars over the years. In 1970, Schenk said that the average loan term for a car was 35 months; now it’s about 65 months.
While he guessed the 10-year auto loan is not that prevalent in the credit union industry, Schenk said, if a credit union member asked for a 10-year loan the credit union might say “yes,” so even if it is not advertised, the credit union could still make the loan.
“It’s not the product itself that is predatory, but how you market it and to whom,” Schenk said. “The problem arises when people give products to people who shouldn’t have them, and we saw with the subprime crisis that credit unions aren’t doing that.”
Spiegler said though that he has a problem with the fact that a credit union even offers this product.
“I have a problem when a government employee credit union, which is expected to be responsible, offers customers plenty of rope to hang themselves. At a time when predatory lenders have been singled out for rightful condemnation, how does PSECU get away with extending a product designed to torpedo a borrower’s future?”
Schenk said that the 10-year auto loan is a reflection of a broader marketplace due to the increase in average loan terms and the fact that cars now last longer than they did in the past.
“When a product makes sense for an individual consumer, it’s better to have it than not to have it,” Schenk said.
Zysk said that PSECU also has limits on what they will lend. “Nobody’s going to pay $40,000 for a Prius and get a loan from us.”