Power: Upside Down Loans Rising

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Upside-Down Loans Hurting Recovery by Joseph Szczesny (3/8/2004)
Finding qualified customers is the next uphill battle in the auto industry.

The number of consumers who buy new vehicles owing more on the vehicle they are trading in has increased substantially over the past three years, according to retail transaction data from the Power Information Network operated by J.D. Power and Associates.

In a report published last week, the Power Information Network said that while only 25 percent of trades were an upside-down situation in 2001, today, 38 percent of trades are in this category, according to information it collected in its survey. The PIN collects data on retail trades from more than 6000 dealers in more than two dozen markets.

“This trend toward more upside-down trades is one of the consequences of the intense competition in the U.S. new-vehicle market. To maintain share, manufacturers are keeping monthly payments of new or refreshed models the same by lengthening the terms of finance loans,” the Power report noted.

In addition, the average length of a new-vehicle loan is now 58 months — an increase of almost ten percent from three years ago when loans averaged 53 months. Thus, retail consumers today who opt for the longer-length loans take significantly longer to build equity in their vehicle, the same report noted.

“If this trend continues, eventually the factory will have to provide a heck of a lot of assistance, which is not good news for the automakers,” said Tom Libby, director of industry analysis at PIN. “Right now automakers are legitimately trying to sustain demand and market share through aggressive manipulation of finance instruments, but the long-term ramifications of these efforts are questionable,” Libby’s statement added.

Hurting in Detroit

Scott Sprinzen, the chief auto analyst at Standard & Poor’s, predicting more “subpar financial performance” this year at GM, Ford, and the Chrysler arm of DaimlerChrysler. Rising interest rates, declining lease terminations and lengthening consumer auto loan terms are among other negative factors facing Detroit’s traditional Big Three.

In another recent research report, Deutsche Bank analyst Rod Lache calculated negative equity from upside-down trade-in vehicle had increased from $2900 to $4000 in recent months. “The problem is particularly acute for Ford and GM customers,” Lache’s note added.

“We project this negative equity problem will get worse,” he wrote. “The impact on U.S. demand, price, and mix from this phenomenon could be devastating, particularly if the impact is compounded by rising rates.”

The automakers themselves insist the problem is less significant than the data might suggest.

Paul Ballew, General Motors’ general director of market analysis, said earlier this month that negative equity was not a problem that would hurt GM sales in the future.

Craig Smith, chief executive of Ford Motor Credit, said during a conference call last week that competitive pressure had forced Ford to offer 72-month car loans. In fact, Ford Credit’s experience is that losses from such deals have been smaller than those on 60-month loans that are closer to the norm today.

Smith also said used-car prices are strengthening as the number of low-mileage, off-lease vehicles has declined. The drop in used-car prices had contributed to the increase in negative equity, he added.

The consumers also don’t seem particularly trouble by negative equity since rising incomes help ease the burden on consumer, Smith said.

In another sign the credit situation among car buyers is improving, repossessions by Ford Motor Credit have declined. Ford repossessed 18,000 cars in January from people who didn’t make their monthly payments, down from 19,000 in the same month last year, and 15,000 cars in February, compared to 17,000 during the same month in 2003.

The percentage of customers more than 60 days delinquent on their loans also dropped, to 0.26 percent in January and 0.21 percent in February from an average of 0.42 percent in the first quarter last year.

Smith said the credit picture would improve further as the overall economy and the employment picture also improves.

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