Wednesday, January 28, 2015

Auto lending: "keep your eyes on the exit door"

Stagflationary Mark recently linked to an interesting article from Bloomberg, Honda Warns Against ‘Stupid’ Auto Loans. What makes the article interesting is a couple of quotes it includes and the sense of deja vu they inspire.

The first quote is from John Mendel, Honda's US sales manager:

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."

In sounding this note of caution, Mendel echoes Jeff Williams, CFO of America's Car-Mart, who said last year that:

"We believe that our customers have never been more stressed financially and, at the same time, have never been presented with more aggressive financing options for their vehicles."


The second quote is from Tom Webb, chief economist of Manheim Consulting:

"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."

Like Mendel, Webb is echoing a lending executive. In his case, it's Citigroup's Charles Prince:

"As long as the music is playing, you've got to get up and dance... We're still dancing."


Prince's quote coincided with an intensification of the financial crisis. Will Webb's quote coincide with a peak in auto lending? I'm not sure-- I wasn't around during the last auto-lending cycle, so I don't have a good sense of how much longer this one will last. But we've clearly entered the reckless phase of the cycle.

To borrow Webb's metaphor, I think it will turn into a snuff movie for some of the more aggressive lenders.

5 comments:

  1. Recently stumbled on your blog and I really enjoy it!

    Have you seen:
    http://dealbook.nytimes.com/2015/01/26/investment-riches-built-on-auto-loans-to-poor/

    It echos a similar sentiment to the bloomberg article as well.

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    1. No, I hadn't seen that before. Thanks for the link, and I'm glad you like the blog.

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    2. I agree with this: "But this market is as much about Wall Street’s perpetual demand for high returns as it is about used cars."

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  2. Young Money,

    The point about longer duration loans leading to negative equity as car depreciates is an astute one. I wonder if this is causing people to hold on to their cars longer -- and whether if this is what keeps used car prices elevated. If so, I also wonder if and when a downturn occurs, the damage will be severe to the car rental companies as all the defaulted & seized used cars gush in to the market.

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    1. Sorry for the late reply... That's a really interesting observation and something I hadn't thought of.

      Generally speaking, I think there's a lot of pro-cyclicality in the used car market, and it has the potential to hurt both auto lenders and the car rental companies.

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