With new-vehicle sales slowing, a Honda Motor Co. executive fears that lenders are relying on extended-term loans to spur volume.
“You’re ringing the bell on a new-car sale, but that customer is saddled ― they’re stretched so thin,” said John Mendel, Honda’s U.S. sales chief, at the North American International Auto Show last week, according to a Bloomberg article.
Mendel called the increasingly common 84-month loans “stupid not just for us, but for the industry.”
Extended-term loans perpetuate negative equity. Take, for example, a $25,000 loan at 5% interest for 72 months. After four years, the loan will have been paid down to $12,000. But how many consumers keep their cars more than four years? The likelihood is high that the remaining $12,000 balance will have to be rolled into the next $25,000 loan. Even with seven-year term, monthly payments on the new loan would be $500 a month.
If lenders aren’t careful, the industry might be forced to relive the 20% sales declines of 2008 and 2009, Mendel argued. Honda, for one, isn’t taking any chances. Mendel said the carmaker will rely on 36- and 48-month loans to facilitate new-vehicle purchases.
Mendel’s comments are one of the most forceful by an OEM executive in recent months on credit underwriting standards.
