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 Financing arms of car companies, including Toyota Motor Corp, Honda
Motor Co and Ford Motor Co, made half of all new U.S. car loans in
the first quarter, up from 37 percent a year earlier and the largest
percentage of the market in four years, according to credit data
firm Experian.
These companies also write the vast majority of leases, which
contributed a record 26 percent of new car sales in the quarter, up
from 23 percent last year and 20 percent in 2012.
The financing arms are providing subsidies from the manufacturers,
lowering monthly payments and extending loan terms to make it easier
for buyers to drive away in a shiny, new vehicle. As a result, major
banks are increasingly moving into riskier parts of the market to
make loans.
US Bancorp, for example, for the first time ever decided to start
financing used cars, an area of the market that the automakers'
finance companies have little interest in. It also started offering
loans to less creditworthy borrowers.
And Wells Fargo & Co has been leveraging off a nationwide deal with
General Motors Co to provide loans subsidized by the No. 1 U.S.
automaker. Wells sees this as a way to gain more of the used car
loan business at GM dealerships.
The aggressive push by car companies is beginning to raise questions
among industry analysts and consultants about whether it is
sustainable.
If interest rates rise, the automakers could find the incentives too
costly unless they are prepared to take a hit to profits - with any
pullback in the deals being offered customers running the risk of
hurting demand. And, if used car prices weaken, the financing units
could be hit with losses on vehicles coming back from leases and
repossessions.
The automakers’ financing companies are doing substantially more
than they were just a year or two ago, said April Ancira, vice
president in the San Antonio office of Ancira Motor Co, a
Texas-based group with 11 dealerships selling GM, Nissan, Fiat,
Chrysler, VW and Ford cars.
"They're being very aggressive with incentives," Ancira said.
Pete Carey, vice president for sales at Toyota Financial Services,
said incentives are playing a bigger role as automakers look to
stand out in a crowded market where the basic quality of cars is
uniformly good.
"We're at a point in the industry that we're spending as much as
we've ever spent," Carey said.
The strategy is currently paying off in spades for automakers. All
the major automakers posted healthy profits in the first quarter.
U.S. car sales rebounded in May to an annualized rate of 16.8
million vehicles, against 15.6 million for all of last year. Sales
were only 10.4 million in 2009 as the recession crushed demand.
Outstanding U.S. loans on new cars totaled $811 billion at the end
of March, up 11.6 percent from a year earlier, according to Experian.
FEARS OF USED-CAR GLUT
The automakers are in a position to offer the deals because their
cost of borrowing has gone down as their balance sheets have
improved and as bond investors have lined up to buy securities
backed by loans and leases.
But they risk sweetening the deals so much that it starts to cut
into their profit margins. In a few years time, as the leased
vehicles are returned, the strategy could lead to a glut in the
used-car market.
If a car turns out to be worth less at the end of a lease than
projected, the finance company will take a loss on the lease, said
Jim Ziegler, a consultant to car dealers. "It appears as a profit
until they get the car back,” Ziegler said.
Analysts at Moody’s Investors Service said car resale values at the
end of leases have so far tended to be higher than assumed,
resulting in double-digit gains for finance companies and lease
investors. But the gains have started to decelerate to single-digits
now and they expect to see that downward pressure continue this
year.
"There is still room for used car prices to decline before we see
any losses," said Aron Bergman, of Moody's. But, he added, “the
gains are going down."
SWEET SUBSIDIES
The average monthly lease payment for the most-leased car in
America, the Honda Civic, was $251 in the first quarter, according
to Experian.
But when Jonathan Stierwald, a Minnesota resident, wanted to lease a
car for his nephew, he found Mike Piazza Honda in Pennsylvania
willing to lease him the car for three years for just $80 a month.
He flew there to get the deal. The lease was financed by Honda's
finance arm.
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The details of the deal could not be determined. A salesman at the
Langhorne, Pennsylvania dealership, which is owned by Piazza, the
former All-Star baseball catcher, said factors such as a high credit
score and higher down-payment may have helped. Honda representative
Steve Kinkade said the dealership could have added its own
incentives on top of the company's promotions.
Honda, which was fifth in U.S. auto sales in the first five months
of the year, increased its average subsidy per leased car by 26
percent to $1,476 in that period from a year earlier, according to
Edmunds.com.
Kinkade said the company is pleased with how its finance unit has
paced its leasing to drive sales without too many of the cars later
coming onto the used car market and depressing prices.
Others are liberally using subsidies, too. Toyota subsidized 92
percent of its U.S. leases in its fiscal year ending in March, up
from 82 percent the year before.
"We can get fairly aggressive with pricing or payments, depending on
what we anticipate the used market to look like," Toyota's Carey
said.
Auto industry analysts and consultants said they did not think the
situation was getting out of hand just yet.
The average incentive per car sold so far this year was $2,918, up
slightly from $2,825 a year earlier and just under 10 percent of the
average transaction price, according to JD Power & Associates data.
BANKS IN USED-CAR LOTS
Automaker finance arms are also offering loans at interest rates as
low as zero percent. And, they are taking on more loans to borrowers
with subprime credit ratings, according to data from Experian.
The length of loans is also increasing. Lenders granted one-in-four
new car buyers more than six years to repay in the first quarter, up
from one-in-five a year earlier, the figures show.
The average monthly payment on new car loans was $474 in the first
quarter, only $15 more than a year earlier, even as the average
amount financed rose by $964 to a record $27,612.
Unable to compete, some banks are in retreat.
Ally Financial Inc, which was once GM's financing arm but is now on
its own, increased its financing of used car purchases by 14 percent
in the first quarter from a year earlier, but its new car lending
declined so much that it made 6 percent fewer auto loans in total.
US Bancorp estimated that used cars will eventually make up
40 percent of its auto loans after doing none in the past. Consumers
with "nonprime" credit scores, defined as below 675, will account
for 15 percent of US Bancorp’s portfolio, compared with none
previously.
Not that the opportunity in the used car market isn't also large -
in terms of numbers of vehicles sold the used car market is more
than twice the size of the new-car market.
Tom Wolfe, executive vice president of consumer credit solutions at
Wells Fargo, said its partnership with GM improves its ties with
dealers and that for every subsidized new car loan it makes for GM
at a dealer it will pick up three used-car loans. Wells Fargo is the
largest U.S. used-car lender with a 7.1 percent market share,
according to Experian.
Wolfe said customers who borrow to buy a used car so that they can
get to and from work are good credit risks.
(Reporting by Bernie Woodall in Detroit, David Henry and Peter
Rudegeair in New York. Additional reporting by Nick Carey in
Chicago. Editing by Paritosh Bansal and Martin Howell)
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