This Is An Actual Conversation With A Car Dealer - And It Shows How The Industry Is Juicing Sales
Back in late June, Morgan Stanley auto industry analyst Adam Jonas highlighted that car dealers were stretching out the length of auto loans, allowing sales to strengthen as monthly auto payments decline.
In Thursday's note, Jonas relays a recent conversation with his uncle "Chuck," a Chevy dealer in Canton, Ohio, which shows that this trend towards ever-lengthening hasn't slowed, but in fact accelerated through the summer.
Here's what "Chuck" had to say:
Jonas: How are August sales going so far?
Chuck: We're holding our own. Nothing Earth shattering. We're pushing hard for a big, strong Labor Day weekend finish. The month hasn't been as good as we hoped but it could have been worse.
Jonas: How's the incentive environment?
Chuck: GM brought back 0% for 72 on the trucks and selected models so that was a Godsend to us. It's not uncommon anymore to do 75 to 78 month loans. It used to be that 60 months was the norm. Then it went to 66 and now it's over 70.
Jonas: Are you saying >72 month loans are normal?
Chuck: Absolutely. People don't seem to care anymore. It's all about the monthly payment. Folks just want a car, have a monthly budget and they say: "Just tell me how I can fit this into my monthly budget." They don't care as much if they still have half the loan balance left after 5 years. Now we do get people who we put into 75 month loans from 4 or 5 years ago that are coming back today asking us: "How can I get out of this loan?"... but that's a different story.
But this trend towards longer loans isn't limited to new cars, but also leases, as the "subprime lease" category has emerged as a more popular type of auto loan.
Jonas: How's the leasing business?
Chuck: We're witnessing a drastic increase in our lease business. The latest flavor is the 'Subprime Lease'. A lot of banks are doing internal scoring now to help consumers with a bad score but a good history to get into a new car. So once we verify employment and income we can run them on a lease with a 2.5 factor instead of a 0.001 factor. It may increase the monthly payment by 40 to 60 bucks, but you can get them into a new car they can afford. Subprime leases have been around for a while, but have clearly become more prominent lately. For example, you'll see it with more young adults, only 6 months on payroll and getting credit scores established.
Jonas: What do you think of FICO recalibrating their scoring definitions to broaden availability of credit to more consumers?
Chuck: To me... that's opening up Pandora's box. When we start recalculating the basics to help more people, we may be inadvertently creating problems. Time will tell.
So basically, dealers are getting customers into longer loans, with lower monthly payments, that aren't actually cheaper.
This chart from a New York Federal Reserve blog post on August 14 shows the composition of auto loans, which are on the rise for borrowers of all credit scores.
As the Fed wrote:
"So, subprime auto lending is definitely on the rise in absolute terms, although the increase in prime auto lending over the same period makes the relative increase in the subprime share less pronounced... We will continue to monitor this ongoing change in the consumer lending market."
