Former subprime lender defends longer term car loans

Jody Shenn and Matt Scully
Bloomberg News

The man who created one of the biggest U.S. subprime lenders says there’s nothing dangerous about borrowers being given longer car loans.

When Thomas Dundon helped start the lender that’s become Santander Consumer USA Holdings Inc. in the 1990s, subprime borrowers typically were offered four-year car loans, he said Monday in an interview. Now, the standard is six years, he said, partly because wages haven’t kept up with vehicle prices.

Using longer terms to lower payments makes sense when the alternative for consumers and lenders is “a shorter term with an older, cheaper, less-reliable piece of transportation,” he said, after being replaced as the lender’s top executive this month when Banco Santander SA bought out his minority stake.

Stretching out how long it takes buyers to pay off loans is helping to make cars affordable at rising prices and stoking sales. As volume of subprime auto debt rebounds after collapsing during the credit crunch in the wake of the 2008 financial crisis, the wisdom of lending over ever-expanding periods is being questioned.

The Office of the Comptroller of the Currency warned about the trend across the car loan market in a June report, saying “extended terms are becoming the norm rather than the exception and need to be carefully managed.” Longer loans may increase the odds of lenders suffering losses on repossessions and of consumers walking away from vehicles needing repairs.

The average loan term for new vehicles reached a record 67 months in the first quarter, with the figure for subprime new-car debt approaching 72 months, according to Experian Automotive data. For used cars, the average reached a record of 62 months, with the length for the least reliable consumers exceeding 56 months, the data show.

Dundon, 43, who remains on Santander Consumer’s board, said that extended terms also come with vehicles lasting longer and with the industry having slowly tested increases over time.

“The data would tell you that as long as the payment is affordable and quality of the vehicles is improving, the math says you’d rather give more term so the customer can get a better car,” he said. He added that seven years may soon be the standard for prime loans.

Investors in bonds backed by car loans and credit graders got too complacent in recent years about newer lenders that might not have the processes in place to ensure compliance with regulations, before getting more cautious, Dundon said. Santander Consumer is the most-active issuer of subprime-auto securities.

Over the course of a car loan “a lot can happen,” he said. “You’ve got to put your capital behind people who can follow all the rules that you have to follow. For a little while, it probably got to where they weren’t selective enough.”

As the industry faces more scrutiny in the wake of the financial crisis that subprime loans on houses helped to spark, Dundon said that he’s surprised of the attention.

“There’s a lot of people in the world that are in different situations and the fact that this industry has become very efficient and helps people keep their costs down to get something that a lot of us take for granted, I think that’s a good thing,” he said. “Unfortunately it seems to be painted as something bad, and I’m not sure why.”