Why a large U.S. auto lender isn’t concerned about ‘forever loans’

The head of one of the nation’s largest auto finance lenders isn’t overly concerned about rising consumer automotive debt and inflated used car prices leading to longer loans on vehicle purchases.

His main reasoning? The percentage of income consumers are spending on their vehicles has remained relatively flat compared with 2019, before the coronavirus pandemic led to inflated pricing as demand surged but inventories stayed low.

“If I just told you, ‘Car prices going up, interest rates going up, insurance prices going up,’ you would say, ‘You know what, consumers must be paying more as a ratio to the income,'” Capital One Auto President Sanjiv Yajnik told CNBC. “However, if you look at every quintile of salary and earnings of people, the payment-to-income ratio has remained fairly flat.”

While Capital One reports median monthly car ownership payments have jumped from $390 to $525 since 2019, data provided exclusively to CNBC from its automotive unit suggest that vehicle costs have stayed relatively stable compared with income. That’s because, overall, the payment-to-income ratio has remained flat at approximately 10% since 2019, according to the automotive arm of the American bank.

Capital One Auto found 80% of car purchasers who finance a vehicle are below the generally recognized payment to income threshold of 15%.

“The consumer is being cautious. They’re being responsible. This is a much healthier way to do things than the alternative, because it’s not a discretionary spend,” said Yajnik, referring to consumers prioritizing vehicle payments for transportation, including work.

To get to that goal, however, more consumers are taking on longer loans to keep payments affordable.

The auto finance veteran’s view contrasts with others in the industry who view the longer term loans as a detriment to consumers’ pocketbooks.

They argue that so-called “forever loans” of six years or more have led to many buyers, particularly of new vehicles, being underwater on the equity of their cars and trucks. That means they owe more than their vehicle is worth when they decide to trade it in.

Edmunds reports roughly 26% of used vehicles purchased that involved a trade-in vehicle had negative equity this year through April. The amount of negative equity averaged $5,105, a 35% increase from 2019.

“As loan term lengths increase on average, the pace at which consumers make progress paying down their balance slows,” Jessica Caldwell, head of insights for CarMax‘s Edmunds, wrote in a recent online post. “If consumers then trade in their vehicle too soon for any reason, they are increasingly left holding more loan debt.”

Regarding financing for new vehicles during the first quarter, 90.2% of new vehicle loans involving trade-ins with negative equity carried terms of at least 72 months, and 43% extended to 84 months, according to Caldwell. The average negative equity…