A growing reliance on longer loans to help spur new vehicle demand could soon start backfiring on Detroit’s carmakers, a leading industry research firm said.
According to Reuters, the Power Information Network, an affiliate of JD Power and Associates, said the problem is that an increasing number of potential car buyers are finding that they owe more on their trade-in vehicles than they’re actually worth.
Known as an “upside-down” situation, it’s a trend that may already be sapping overall demand for new cars and trucks, which account for about one-fifth of US retail sales, the report noted.
The Power Information Network reportedly said 38% of trade-in vehicles are upside-down today compared to just 25% in 2001, when Detroit’s price war escalated soon after the September 11 attacks. The average length of a new vehicle loan is now 58 months, up from 53 months three years ago, it added.
“If this trend continues, eventually the factory will have to provide a heck of a lot of assistance, which is not good for the carmakers,” Tom Libby, Power Information’s director of industry analysis, said in a statement cited by the news agency.
Reuters said that, by assistance, he was referring to consumer incentives, including hefty cash-back deals that are already weighing on profits at companies like General Motors and Ford.
“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 reportedly said.
Reuters said he did not elaborate but the news agency noted that Power Information Network’s report coincided with one from Scott Sprinzen, the chief auto analyst at Standard & Poor’s, predicting more “subpar financial performance” this year at GM, Ford and Chrysler.
Sprinzen reportedly cited “rising interest rates, declining lease terminations and lengthening consumer auto loan terms” among other negative factors facing Detroit’s traditional Big Three.
According to Reuters, in a recent research report, Deutsche Bank analyst Rod Lache noted that so-called negative equity on the average upside-down trade-in vehicle had jumped from $US2,900 to $4,000 over the last five months alone.
“The problem is particularly acute for Ford and GM customers,” Lache reportedly said, adding: “We project this negative equity problem will get worse. The impact on US demand, price and mix from this phenomenon could be devastating, particularly if the impact is compounded by rising rates.”