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The San Diego Union-Tribune

 
New-car financing feeling credit crunch

AUTOMOTIVE NEWS

January 5, 2008

A sign of the times: Toyota Financial Services, historically a poster child for conservative lending practices, now makes 84-month vehicle loans.

As automakers offer fewer incentives and interest rates rise from record lows, the industry is relying more on long loans to reduce monthly payments in a soft new-vehicle market.

But even as the number of monthly payments rises, consumers also are paying more each month to finance new cars and trucks. That combination, industry officials and analysts warn, is driving more buyers into loan delinquency, sending some consumers downmarket and keeping other consumers out of the market altogether.

The industry “has hit a wall on how much it can extend loan maturities,” said Jonathan Steinmetz, an auto industry analyst for the Morgan Stanley investment firm. Meanwhile, he said, new-vehicle costs continue to rise.

Just a few years ago, automakers' finance companies and other big lenders shunned loans longer than 72 months. Lenders said longer loans are more likely to make consumers upside down, owing more on their vehicles than the vehicles are worth.

Today, though, Toyota Financial says it is battling for market share with banks, independent finance companies and credit unions. Those institutions began extending loan terms in response to automakers' promotions offering 0 percent interest after the Sept. 11, 2001, terrorist attacks.

“There is demand for 84-month loans,” Toyota Financial spokeswoman Kerry Rivera said. “Banks and credit unions were picking up business from our customers.” Nearly 4 percent of new-vehicle loans financed through franchised dealerships are for 84 months or longer, according to the Power Information Network. That's up from 2.4 percent in 2004, Power said.

The Big Three's finance arms said they generally limit 84-month loans to customers with pristine credit who buy the most expensive vehicles. Rivera said Toyota Financial offers 84-month loans for new and certified used vehicles to buyers with top-tier credit.

The most common vehicle loan term is now 72 to 77.9 months, Power said. That category accounts for nearly 40 percent of all new-vehicle loans.

Stretched-out loans were supposed to make monthly car payments more affordable. But that hasn't happened.

The average monthly payment for a new vehicle financed by a Big Three company exceeded $500 in seven of the first nine months of 2007, according to a Morgan Stanley analysis of federal economic data. The last time the average payment was significantly higher was nearly six years ago.

An interest-rate cut by the Federal Reserve Board in August did not restrain vehicle payments, the Morgan Stanley analysis said. The average retail rate on a dealership-arranged loan now is 7.6 percent, Power said, up from 6.4 percent in 2004.

The monthly payment for a $20,000 vehicle on an 84-month loan at 7 percent is $301.85. By contrast, a 0 percent loan over 48 months has a monthly payment of $416.75.

David Cosper, chief financial officer of Sonic Automotive Inc. and a former executive at Ford Motor Credit Co., said a $500 monthly payment is a price point for many buyers.

Sonic, the nation's No. 3 dealership group, sold more than 140,000 new vehicles at retail in 2006. In 2007, Cosper said, a growing number of customers traded down to cheaper – and less profitable – vehicles.

Brandtailers, an advertising agency that works with dealers, reported a similar trend. “We see a 20 percent overall decline in shoppers since August, mostly in luxury vehicles,” Chief Executive Officer Cheril Hendry said.

A study by the TNS Automotive market research firm cited the subprime mortgage crisis, which has weakened the U.S. housing market. A TNS survey of 2,500 consumers showed many are shopping for lower-cost vehicles or shunning expensive options.

Power Information Network data also show that consumers increasingly are opting for smaller, more fuel-efficient vehicles. Since 2004, compact cars' share of the U.S. car market has grown to one-third from about one-fourth, Power says. Market shares for large and mid-sized cars have dipped.

Some dealers say they recommend leases rather than longer loans to customers who seek a smaller payment. About 18 percent to 20 percent of new vehicles now are leased, compared with about 14 percent to 15 percent two years ago, Power Information Network said.

Larry Fletcher, general manager of Rapid Chevrolet-Cadillac in Rapid City, S.D., said he tries to talk customers out of loans longer than 60 months. “They pay less interest and have an equity situation a lot sooner.”

Nick Stanutz, senior executive vice president of Huntington National Bank, said longer loans have lost their ability to stimulate sales.

“Consumers can't trade as they have in the past,” Stanutz said.

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