Some fear auto industry returning to bad habits
More than a quarter of new buyers are choosing to lease, a historically high percentage
Big discounts. Six- or sevenyear loans, in some cases to buyers who would have been turned down in the past. As the auto industry strives to sustain its post- recession comeback, car companies are resorting to tactics that some experts warn will lead to trouble down the road.
Vehicle discounts have risen 5.5 per cent from a year ago. More than a quarter of new buyers are choosing to lease, a historically high percentage. Auto company lending arms are making more loans to people with low credit scores. The industry is adding factory capacity. And the average price of a car keeps rising, forcing some customers to borrow for longer terms to keep payments down.
Annual auto sales in the US should top 16 million for the first time in seven years. But the pent- up consumer demand that has driven sales is ebbing. Sales are predicted to grow 5.5 per cent this year, the slowest pace since the financial crisis.
The big discounts and other steps eventually should help push sales above 17 million, most experts say. But Honda Motor Co. US sales chief John Mendel last week scolded competitors for using “short- term” tactics such as subprime loans, 72- month terms and increased sales to rental car companies to pad their sales. Among the numbers that concern some experts:
$ 2,702: Average discount per new car through July. They’re heaviest in two segments: Midsize cars ( up almost 21 per cent through July) and compacts ( up 10 per cent). Automakers need to move the cars because a lot of factory space is committed to building them.
12.7 per cent: The year- overyear increase last quarter in auto
loans to “Deep Subprime” buyers — those with credit scores lower than 550. Loans to “subprime” buyers ( credit score lower than 620) rose 5.3 per cent, according to Experian. Combined, both are just over 12 per cent of all auto loans. Those with lower credit scores generally have a higher default risk.
32 per cent: Percentage of auto loans that are 72 months or longer, up from 23 per cent in 2008, according to LMC Automotive. Dealers can offer longer loans on expensive cars, making the payments seem reasonable. But those loans are loaded with interest early on, so it takes a long time for buyers to pay principal and build equity for a trade- in.
26 per cent: Percentage of sales that are leases, up from 18 per cent in 2008, according to LMC. A flood of expiring leases in three years could depress usedcar prices, hurting newcar sales.
70 per cent: The increase last quarter in auto repossessions, according to Experian Automotive. Sixty- day delinquencies are up 7 per cent. Still, both are below 1 per cent of all auto loans.