Spitzer Ford sales manager Jerry Randall has a way to lower customers' monthly payments to boost car sales: stretch the loans over six years.
"People love them, they really sell more cars," said Randall, whose sales rose 7 percent last month at his dealership in Cuyahoga Falls, Ohio. Monthly payments on a US$24,000 Ford Taurus are US$352.95 with a six-year loan at 1.9 percent interest, less than the US$400 for five-year financing with no interest.
That draws buyers who typically can't afford a new car, he said. Ford Motor Co is the lender, so Randall isn't losing money when more of those buyers default. And they do, figures show.
Ford, General Motors Corp and DaimlerChrysler AG's Chrysler unit are extending more of their loans to six years rather than five, and taking on a greater default risk. They're trying to avoid losing sales to overseas makers such as Toyota Motor Corp and Honda Motor Co.
Car buyers are more than twice as likely to default on a six- year loan than on five-year financing because these less-affluent borrowers may run short on cash. Automakers earn as much as US$3,300 less on each car they sell at 1.9 percent interest than they would with rates of about 6 percent charged by banks, Comerica Bank Chief Economist David Littman said.
"They're doing a financial juggling act," said Lynn Yturri, a fund manager for Banc One Investment Advisors, which owns 100,000 preferred General Motors shares and sold 100,000 Ford shares in December. "Every time we look at these stocks we come up with another big problem. I'm looking to get out of my General Motors shares."
US automakers pay so much more for such fixed costs as pensions, health-care coverage and factories than overseas rivals that it's cheaper to keep making cars when demand slows rather than shut plants, analysts said.
General Motors spends US$842 on pensions for every car built in North America, for example, more than US$100 at Toyota, said Morgan Stanley analyst Stephen Girsky.
General Motors stock fell 39 percent in the year through Feb. 25, while Ford slid 47 percent and DaimlerChrysler's US shares declined 24 percent as US automakers lost market share to overseas rivals. Those declines were larger than the 4 percent slide in Honda's American depositary receipts and an 8.7 percent drop in Toyota's ADRs.
Borrowers end up paying more for the lower monthly costs by the end of the loan. A Taurus buyer with six-year financing pays US$1,412.96 in interest over the life of the loan, while some five-year loans have no interest charges.
About 5.6 percent of buyers don't repay 72-month loans, more than twice the 2.1 percent who default on 60-month loans, said CNW Marketing/Research, a company that studies consumer borrowing. The number of six-year loans will rise to 300,000 within three years from 34,000 in 2001, CNW estimates.
The portion of all Ford loans that span six years has more than doubled to 15 percent from 7 percent in the third quarter of 2002 as rebates and no-interest financing with shorter durations lost their allure for US buyers, said the Power Information Network auto data company. Automakers began offering interest-free loans to draw customers back into showrooms after the Sept. 11 attacks, more than 17 months ago.
The more automakers use the six-year loans, the better their sales. Ford offered 72-month loans on 19 models in January and its US sales rose 4.1 percent last month. General Motors used the loans from its General Motors Acceptance Corp unit on just six models and sales fell 2 percent, while Chrysler had such loans on two models and sold 12 percent fewer autos.
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