At the recently concluded 2015 North American International Auto Show in Detroit, Honda’s U.S. sales chief John Mendel called the practice “stupid.” He said in an interview with Bloomberg that selling vehicles with extended-term auto loans is a stupid move for automakers and the industry itself.
Many automakers successfully boost sales by offering longer-term car loans to buyers. They give consumers the option to repay the loan for as long as 84 months. While extended-term loans seemingly make vehicles more affordable for buyers, it makes repayment more difficult. Mendel pointed out that the extended period makes it tougher for consumers to repay faster than vehicles lose their value.
He described such car buyers as “stretched so thin.”
Mendel said that Honda will avoid stretched-out auto loans, even as another Japanese carmaker threatens to take its place as the fifth-largest automaker in the United States. Nissan Motor Co. trails behind Honda, but has narrowed the latter’s lead to fewer than 20,000 vehicles last year.
Mendel said that rather than do what many competitors do, Honda will stick to offering auto loans that are 36 to 48 months long. These repayment periods will enable buyers to owe less than their vehicle is worth when the said vehicle is sold as a pre-owned unit. Mendel noted that this will help them sell more cars, since consumers in equity buy another vehicle.
He predicted that Honda’s U.S. sales will increase 2 to 4 percent in 2015, driven by demand for three new or refreshed SUVs. These are the compact CR-V, the subcompact HR-V and the mid-size Pilot.
There are people who agree with Mendel’s statement about stretched-out car loans, including Tom Webb. The chief economist at Manheim Consulting mentioned that the industry assumes more risk when automakers offer stretched-out loans with small down payments to consumers in less than ideal credit situations.
According to Experian data, more than one in four new-vehicle loans in October and November 2014 had term lengths of 73 to 84 months. Back in 2009 and 2010, new-vehicle loans at these lengths accounted for less than 10 percent of all new-vehicle loans.
2014 was a record year for U.S. auto sales. Automakers sold 16.53 million vehicles, up 6 percent over the previous year and the best sales record since 2006. Volume is expected to increase to 16.7 million in 2015.