Honda warns against ‘stupid’ loans
A top U.S. executive at Honda Motor Co. said competitors are doing “stupid things” to boost auto sales, including making seven-year-long car loans that harm buyers.
Automakers are increasingly selling vehicles with 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value, John Mendel, Honda’s U.S. sales chief, said in an interview. The Tokyo-based company will avoid longer-term loans even as Nissan Motor Co. tries to supplant it as the fifth-biggest automaker in the U.S., he said.
“You’re ringing the bell on a new-car sale, but that customer is saddled — they’re stretched so thin,” Mendel said at the North American International Auto Show last week. Extended-term loans are “stupid not just for us, but for the industry.”
The comments by Honda’s Mendel were a rare show of caution during the auto show in Detroit, as car-industry executives cheered the best year of U.S. sales since 2006. Deliveries are projected to rise to 16.7 million this year, which would be a sixth straight increase and extend the longest streak of gains since World War II.
Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting. While not in a bubble, the industry is taking on more risk by extending longer loans with smaller down payments to buyers with blemished credit scores, he said.
“We’ve seen this movie before, we know how it ends, and it’s not pretty,” Webb told reporters at an event before last week’s show. “But I say that it has longer to run, and we have already paid the price of admission. So we might as well stay to the end. You just keep your eyes on the exit door.”
More than one in four new-car loans in October and November were 73-84 months long, according to Experian Plc. The share of new-car loans at those term lengths was less then 10 percent in 2009 and 2010.
“It can have some negative impact on the market in creating a vicious cycle of negative equity if the consumer doesn’t hold onto their vehicle long enough,” Melinda Zabritski, senior director of automotive finance for Experian, said by phone. “Something has to be done to keep the market affordable, or consumer buying is going to have to change and we’ll have to return to less frequent purchases.”
Mendel said that rather than chase sales goals, Honda will rely on 36- to 48-month loans that more easily let consumers owe less on their car than what it’s worth when sold as a used vehicle.
“They’re in equity, don’t put any more money down, they get another car — we call it keys-to-keys,” he said. “That’s the kind of experience that really ingrains loyalty.”