Toyota didn't use six-year loans, and its US sales fell 5.7 percent in January. Honda sales rose 6 percent because the company added the Element and Pilot sport-utility vehicles and a redesigned Honda Accord to its product line. US automakers' share of domestic sales slid to 59.1 percent in January from 59.2 percent in the year-earlier month.
The strategy of propping up sales with six-year loans will backfire on US automakers, said Tony Plath, a banking professor at the University of North Carolina in Charlotte.
"We hear about predatory lending. Well, this is going to encourage predatory borrowing," Plath said "People will just walk away with a free car and stop paying."
Ford and General Motors plan to use more asset-backed securities, bonds backed by collateral of auto loans, to raise money this year for their business because that borrowing is less expensive than unsecured corporate bonds. Adding 72-month loans to the collateral of asset-backed bonds will force automakers to pay investors a higher yield, said Anthony Thompson, managing director and head of US asset-backed research at Deutsche Bank.
"It's probably US$10,000 more on a US$100 million bond," he said. "That starts to add up when you're talking about a very big deal."
Automakers began offering the six-year loans to compete with banks. Bank One Corp and Bank of America Corp are already writing about 40 percent of their auto loans at 72 months and Wells Fargo was as high as 79 percent in 2002, Ford spokesman Jim Cain said, citing Power Information Network figures. Interest on six-year loans from a car company range from 1.9 percent to 4.9 percent, lower than the 6 percent to 10 percent at banks.
The higher default risk and costs will pay off by drawing new buyers who may otherwise have been able to afford only used cars, said Mark Norman, Chrysler vice president of sales and marketing.
Automakers are betting buyers with six-year loans will trade in their cars before the loan is up, limiting the costs for car companies, he said.
"We can manage the risk and still get more buyers," Norman said. "I'd rather be marketing to my own customer than having them get the loan from a bank."
Automakers charge lower interest rates than banks do on six- year loans. Wells Fargo & Co, for example, charges a customer with a good credit history 6.09 percent interest on a 72-month loan, according to the bank's Web site.
The 1.9 percent loan on a Taurus would yield US$1,412.96 in interest in six years, while the same loan at 6.09 percent would earn US$4,711.42. Ford pays the difference between its cost to borrow money for loans and revenue from 1.9 percent interest as a marketing expense, Cain said. "Every vehicle that's financed at 72 months by someone else is a lost opportunity," he said.
General Motors agrees. The world's biggest automaker uses the loans on its least expensive models as "a market-expanding move," said John Smith, group vice president of sales, marketing and service.
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