The recent surge in car loan demand in the USA is making news but it has also made financial experts worried. A huge number of people are opting for loans to buy vehicles, including second hand models. According to industry data, a whopping 85 percent of newly bought cars and 53.8 percent of second hand vehicles were financed in the 2nd quarter. The amount of automobile loans and their monthly premiums have also shot up considerably, more so for used vehicles. Compared to this quarter in 2013 the average monthly payment for used cars rose 1.1 percent and the loan shot up by 1.9 percent.
Industry analysts are of the view the buyers especially those with average credit score are opting for used vehicle market. The banks are also showing an unprecedented willingness to finance such cars and they financed almost 35.6 percent of all such deals. In recent times, they have started concentrating on used car market since in-house financing entities of carmakers are dealing with new car market.
The regulatory bodies are skeptical of these banks policies and their eagerness to lengthen car loan terms. They are even lending money to people with abysmal credit scores and people who were refused loan earlier are also getting the nod. The other weapons used by banks are large discounts and loans spanning to 6 and 7 years repayment duration. The leading auto lender in the USA is Wells Fargo & Co and it is followed by Ally Financial Inc. The third place is occupied by Capital One Financial Corp which has raced ahead of JPMorgan Chase.
As the US auto industry tries to regain its position post recession, these aggressive selling tactics adopted by some car makers can create trouble in long run, think the experts. The fact that car discounts have shot up 5.5 percent compared to the previous year is one point in concern. The average car cost is on rise which is in a way compelling customers to opt for long term loans.
It is expected that yearly car sales in the USA should cross 16 million, owing to this surge in bank loans for automobile sector. One motor company that has lambasted rivals for resorting to aggressive short terms tactics to boost sales is Honda Motor Co. John Mendel, the company’s U.S. sales chief, made it clear the Japanese origin car giant will not walk down the path. Incidentally, Honda’s US sales this year is not much upbeat.
Wall Street analysts sound mild to moderately cautious in their feedbacks. One analyst associated with Morgan Stanley said the surge in sales can turn into a slump next year. This may eventually lead to job loss, restructuring and factory closures. While the automakers are in better positions to handle a slump in sales compared to the disastrous phase in 2008, rampant lending practices does bring back unpleasant memories. Experts with a more liberal view however think delinquencies and repossessions are quite low now. Besides, longer loan terms ensure low payments, diminishing defaults and late payments.
The author writes on diverse lending packages and options. He has written plenty of resourceful articles covering automobile sector, short term cash loans and other industries.