Automotive News - May 5, 2008 - (Page 38)

38 • MAY 5, 2008 INSIGHT Dealers hunt upside-down buyers with leases, incentives and long-term loans Announcing! Rosland B. Gammon autonews@crain.com Going up In February 2008, of all consumers who traded in a vehicle to buy a new vehicle, 26.7% had negative equity in their trade-ins. Among consumers who had negative equity in February, the average amount of negative equity was $4,342 — the highest recorded by Edmunds.com. Here’s the average amount of negative equity for the past 7 Februarys. With more than a quarter of their customers upside down on loans, auto dealers and manufacturers are turning to leasing, lucrative incentives and longer terms to sell vehicles. “Dealers and manufacturers are hurting for business and looking for creative ways to bring people in the door,” says Sergio Stiberman, CEO and founder of LeaseTrader.com, a Web site that helps people get out of their lease contracts. According to Edmunds.com, one in four people who traded in a vehicle in March was upside down — owing more on the vehicle than it was worth. On average, the negative equity — the amount by which the balance owed on the trade-in vehicle exceeds the vehicle’s value — was $4,305. The figure measures only shoppers who bought vehicles, says Jesse Toprak, Edmunds.com’s executive director of industry analysis. The amount of negative equity per vehicle reached $4,342 in February — the highest recorded by Edmunds. Sales with negative equity fell slightly between February and March to 26.5 percent — far from its peak of 33.5 percent in September 2003. –$5,000 Average amount of negative equity –4,500 –4,000 –3,500 –3,000 0 Two- and three-year leases represent about 50 percent of sales at the Cascade Auto Group in Cuyahoga Falls, Ohio, says managing partner Michelle Primm. Five years ago, leases represented only about 20 percent at the dealership, which sells Porsche, Mazda, Subaru and Audi vehicles. “The factories are advertising again,” says Primm, who’s also a National Automobile Dealers Association director representing female dealers east of the Mississippi River. The dealership isn’t seeing more upside-down buyers than usual, and the ones who are upsidedown typically want to trade out of vehicles with poor fuel economy, Primm says. “We always have to ask them if it makes sense to trade in too early to pay more just to save money on gas,” she says. Higher rates Financial lenders and manufacturers also are offering longer loan terms to lure buyers, and dealers are discounting vehicles more to allow buyers to qualify for financing, Toprak says. Average auto loan terms have risen from 57 months in January 2002 to 64 months in March, according to Edmunds.com data. But some banks, credit unions and captives such as Toyota Motor Credit Corp. and GMAC Financial Services offer loan terms of as long as 84 months or more. “We’re seeing loan terms getting longer and longer to accommodate the extra amount and not increase payments,” says Toprak of Edmunds.com. “As the terms get longer, the banks are charging higher rates.” While Subaru offers terms as long as 72 months and Mazda as long as 66 months, Primm says only about 10 percent of her dealership’s customers take advantage of the longer terms. “We don’t recommend it,” she says. “We recommend matching the terms of the financial institution with the length of time you want to drive the car.” c '02 '03 '04 '05 '06 '07 '08 February over February More spiffs To boost sales and lure buyers who hold negative-equity loans, manufacturers are offering more incentives, such as cash rebates, Toprak says. The rebates help offset the negative equity. “It’s one of the reasons why we’ll continue to see high incentive spending,” Toprak says. “Without it, one out of four people can’t get a new car.” In March, the average auto manufacturer incentive in the United States was $2,519 per vehicle sold, an increase of 3.9 percent from the year-earlier period, according to Edmunds.com. All together, incentive spending totaled about $3.34 billion, an increase of 13.6 percent from February. GE Money - Warranty Services is now part of Leasing is another method dealers use to get vehicles out the door, Toprak says. Lease deals accounted for 22.5 percent of new-car sales in the first quarter, compared with 18.9 percent in the fourth quarter of 2007, according to Power Information Network, a division of J.D. Power and Associates. “With leases, you hide the negative equity into the lease payment because the payments are lower,” Stiberman says. “Regardless, people are still rolling negative equity; they’re still paying interest.” - Wachovia Dealer Services Long-term loans: Convenience or bad deal? Rosland B. Gammon autonews@crain.com Together we offer a comprehensive suite of F&I after-market products, retail financing and commercial services, providing end-to-end solutions for the financial needs of your customers1. For more information please visit www.geaws.com or call 800-828-1392. As lenders and automakers offer longer loan terms to attract buyers with negative equity in their current vehicles, many in the industry say consumers should beware. “When you’re looking at putting consumers into 72-month or 84-month loans, are you doing them a favor or an injustice?” asks Sergio Stiberman, CEO and founder of LeaseTrader.com, a Web site that helps vehicle owners get out of their lease contracts. “Manufacturers are pressed to sell cars, and the longer-term financing should do it.” Average auto loan terms have risen from 57 months in January 2002 to 64 months in March, according to Edmunds.com data. But some banks, credit unions and captives such as Toyota Motor Credit and GMAC Financial Services offer loan terms of 84 months or more. According to media reports, Volkswagen also is considering a 108-month loan. At the same time, in February the average negative equity — the amount by which the balance owed on the trade-in vehicle exceeds the vehicle’s value — reached $4,342, the highest recorded by Edmunds.com. versus a 60-month versus a 72-month loan, customers are quite surprised at what they’re really not saving. “ When looking at a 48-month MICHELLE PRIMM Cascade Auto Group ” ‘Double whammy’ Traditionally, longer-term loans were reserved for people with higher credit scores who were purchasing vehicles costing $40,000 or more, says Jesse Toprak, executive director of industry analysis for Edmunds.com. Also, exotic cars such as Bentleys had longer terms five to 10 years ago, he says. Now, more consumers choose the longer terms to finance cars costing about $25,000. “The primary issue is as consumers get pinched economically, they’re looking for lower monthly payments,” says Jack Gillis, director of public affairs for the Consumer Federation of America and author of The Car Book. But “when consumers find them- Commercial banking products and services are provided by Wachovia Bank, N.A., Member FDIC and Equal Credit Opportunity Lender. Wachovia Dealer Services, Inc., is a wholly owned subsidiary of Wachovia Bank, N.A. GE Money - Warranty Services is a subsidiary of Wachovia Corporation. ©2008 Wachovia Corporation selves in a situation looking at a 72-month-or-longer loan, it’s a sign they need to buy another car.” The difference between a four-year and eightyear loan can be substantial. A $20,000 four-year auto loan at a 6 percent interest rate would cost about $469 a month and result in total interest of $2,546 over the length of the loan, according to Bankrate.com. An 84-month loan calculated at the same interest rate would lower the monthly payment to $292 but cost $4,542 in interest. Also, because of depreciation, for most of the loan period, the buyer would be upside-down — owing more on the vehicle than it is worth. “It’s a double whammy — negative equity and higher interest,” Gillis says. “When you’re upsidedown on the front end, consumers are going to be in big trouble if an accident happens or if the car gets totaled.” Although Gillis says the loans are dangerous for consumers, the trend toward longer payment terms likely will continue. There is no way to limit the terms, and some consumers want long-term loans, he says. Risky decision The primary problem with longer-term loans, industry analysts say, is that people don’t drive their cars for the length of the loan. Michelle Primm, managing partner of the Cascade Auto Group in Cuyahoga Falls, Ohio, says the dealership advises people against taking long-term loans. Only about 10 percent of Cascade Auto’s customers choose offers such as Subaru’s 72month and Mazda’s 66-month terms, says Primm, whose dealership sells Porsche, Mazda, Subaru and Audi vehicles. She adds: “When looking at a 48-month versus a 60-month versus a 72-month loan, customers are quite surprised at what they’re really not saving.” c http://www.geaws.com http://Edmunds.com http://Edmunds.com?s http://Edmunds.com http://Edmunds.com http://Edmunds.com http://Edmunds.com http://www.geaws.com http://Edmunds.com http://Bankrate.com http://Edmunds.com

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Automotive News - May 5, 2008 Dodge dealers battle to bust Ram logjam Used-car price slump slams luxury makes INDUSTRY IN DISTRESS Tesla opens first dealership in L.A. Los Angeles Top auto execs to talk marketing at seminar Nader and the Corvair: GM edition tells whole story Dealers take Tundra to the people UAW official expects American Axle buyouts Ford plans more UAW buyouts at 2 plants Honda to some dealers: Upgrade or else Hyundai: Powertrains will take us halfway to mpg target Diesel dynamo Daimler cuts Chrysler value, again Ford domestic dealer count dips below 4,000 Seems like old times: More cash on the hood Toyota sister car poses a challenge for Subaru Suzuki to offer standard navigation in $16,000 car Mpg plan fuels states-rights battle Kerkorian interest buoys Ford stock Henderson: GM will keep tight rein on inventory Is it real, or is it just temporary? Ford Motor must stay focused on recovery 'Have you lost your mind?' Dealers are victims of Axle strike Federal oversight? Good heavens, no Geoff Polites: A salute Save a board seat for the UAW A car for everyone or cut, cut, cut, cut? Think of Buick as part of B-P-G Costs up in China, but bargains still abound Mexico sales fall 17% in March Obituary Hyundai reworks Sonata sooner rather than later Nissan's Dominique gets to the big dance Dana seeks new business with Japanese companies ZF will supply Nissan Certified Tool closes a plant German engineering company plans Ala. factory Dealers A Lexus colossus Used-vehicle leasing boosts showroom traffic Certified buyers opt for extended service contracts Repossessed vehicles offer dealers a profit opening Prepaid plans spark service visits beyond oil changes Key to managing floorplan costs: Be realistic Long-term loans: Convenience or bad deal? Dealers hunt upside-down buyers with leases, incentives and long-term loans Where have all the investors gone? Dealer rebounds from contract mess Dealers must choose: Reynolds, GM — or start over AutoTrader.com makes big pitch to bump up new-vehicle sales CAW, Ford reach extensive early labor deal Infiniti asks: Do you smell something? Sure, Nissan GT-R is impractical — but what a rush Faurecia: We'll break even in N.A. Suppliers join carmakers' charge into Russia Chrysler small cars, Jeep crossovers are hot A dreary April in Detroit Penske earnings rise in 1st quarter Lithia posts $1.9 million loss GM makes 2nd ethanol deal Group 1's earnings slip Magna profits down; sales rise AIADA picks dealer of the year Vox(wagen) populi — plus a sales pitch Wagoner's pension shift: More earlier, less overall COMMENT: Bargaining barbs will sting for a long time Bugging the boss: Who's listening to Porsche CEO? New models from the post office Critics have kind words for Pontiac's G8 Ford can't picture kids at design studio

Automotive News - May 5, 2008

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