Upside down Car loans...
The automakers released February sales this week, which came in at 16.4 million unit rate. This was 5% better than last year's depressed levels but was under economists' expectations for the second month in a row. We have expressed concern over the past several years that auto sales were being buoyed by easy financing terms that is causing long-term damage to the industry. Our thanks go to Grant's Interest Rate Observer for pointing out an article in Automotive News dated February 16, 2004. The article highlighted the "upside down" nature of current auto buyers. According to Edmunds.com, 30% of car buyers were upside down in 2003, up from 24% in 2002. Moreover, on average, car buyers are rolling over $3,700 of debt from their previous vehicle into the loan for their new car. This is almost twice the level from 2000. In fact, for the first time ever buyers are financing more than the invoice price of the car. According to the Consumer Bankers Association, consumers financed 100.9% of the invoice price compared to 89% just six years ago. This will cause more drivers to be upside down for years to come. Not only are down payments virtually non-existent, the maturity of loans keeps lengthening. Edmunds.com also reported that over the past decade down payments have dropped from 15% to 5% and article mentioned Morgan Stanley's auto analysts said that the average new car loan is over 63 month compared to 55 months in 2001. Additionally, more than 20% of buyers are selecting 72-month loans.
The article also offered a few examples of what is happening in the dealership financing office. A local Chevrolet dealer did a 96-month loan for a Suburban. The buyer financed $46,911, which was $18,136 more than the invoice price. Several dealers spoke with candor. One dealer in Killeen, Texas, said, "As long as one guy is doing it, in order to compete I have to do it, too. It's terrible for the consumer, but it would be unwise not to compete in the marketplace. And the consumer only cares about the deal you're going to give him." Another in Ohio said, "The customer comes back in and you're trying to bail him out, and they are so far into negative equity you just keep tacking it on. We're not helping them out because they never get out of it."
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