The term of financing for cars and houses continues to lengthen, which represents a sign that the disposable income of the Puerto Rican to pay debt is decreasing.
CPA Kenneth Rivera explained that every day the number of people who purchase a car or a residence with longer-term financing is increasing, not because the asset has greater value, but rather they do not have the money available to cover the promissory notes in a shorter financing term.
“Before, auto loans were taken at five years, and mortgages at 15 or 30 years, which has changed as the economy tightens. Now mortgages have been extended to 40 years and auto loans to seven or eight years,” he said.
He explained that the extension of the loan cancellation term impacts the economy because it reduces the window of time in which the consumer could have discretionary money because the loan had been paid off.
“If a car was paid in five years and lasted 10 years, you had five years of grace to be able to reuse in shopping, travel and entertainment. If that is reduced to two or three years, it is additional money that does not recirculate in the economy, which has its negative impact on the growth of the island’s economic development,” Rivera stated.
However, CPA Eduardo González, who has clients in the auto industry, said that the extending the payment term can lead to greater unit sales.
“Even if they pay more years of interest, people are thinking about their cash flow and not having to give an advance. They seek to finance the debt for a long time to be able to accommodate the monthly payment. That people are offered the opportunity to pay for their car in terms of up to seven years is a correct measure because more cars are going to be sold. There will be more business and this helps the economy,” he said.
González stressed that people are planning their payments according to their budget, although ultimately the alternative of seven-year financing is more expensive than one of 48, 60 or 72 months.
“This increase has been seen in the past four years because what the customer is looking for is the payment they want. I explain to them that if what they are looking for is to change their car every four years, this option suits us, because when they want to replace it, the debt could be greater than the value of the vehicle. I wouldn’t be paying off the debt. If this is not what you are looking for—rather, have it for many years—then there is no problem with this option,” he said.
This statement was mirrored by José Arbona, president of Popular Auto, who acknowledged that Puerto Rican consumers are ever-increasing the span to pay off their car debt, due to the fact that, given the difficult economic situation, they seek to adjust their monthly payments to their financial reality.
“In the last three years, there has been a marked increase in auto financing with a term of 84 months because consumers looking for a more affordable term in their pockets. 45 percent of new car sales at Popular Auto is made with seven-year financing. In used cars, the financing is only up to 72 months, because they are not approved any longer,” he added.
The reasons for this change have to do with the customer’s economy, which has been decreasing in the past years, and with the car prices, which have also been increasing, including those sold at auction.
“Now, cars are worth more because the quality is higher. They are more resistant and last longer, which compensates the risk of financing for a longer period of time. Of course, the credit quality of the client also matters, which—for long-term financing—must have an acceptable credit,” Arbona said.
He added that the financing procedures are being carried out both in person and remotely.