Automakers driving banks from buoyant new car market in US

Jun 17 2014, 02:26 IST
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SummaryFinancing arms of car firms made half of all new US car loans in the first quarter

as we've ever spent,” Carey said.

The strategy is currently paying off in spades for automakers. All the major automakers posted healthy profits in the first quarter. US car sales rebounded in May to an annualized rate of 16.8 million vehicles, against 15.6 million for all of last year. Sales were only 10.4 million in 2009 as the recession crushed

demand.

Outstanding US loans on new cars totaled $811 billion at the end of March, up 11.6% from a year earlier, according to Experian.

The automakers are in a position to offer the deals because their cost of borrowing has gone down as their balance sheets have improved and as bond investors have lined up to buy securities backed by loans and leases.

But they risk sweetening the deals so much that it starts to cut into their profit margins. In a few years time, as the leased vehicles are returned, the strategy could lead to a glut in the used-car market.

If a car turns out to be worth less at the end of a lease than projected, the finance company will take a loss on the lease, said Jim Ziegler, a consultant to car dealers. “It appears as a profit until they get the car back,” Ziegler said.

Analysts at Moody's Investors Service said car resale values at the end of leases have so far tended to be higher than assumed, resulting in double-digit gains for finance companies and lease investors. But the gains have started to decelerate to single-digits now and they expect to see that downward pressure continue this year.

“There is still room for used car prices to decline before we see any losses,” said Aron Bergman, of Moody's. But, he added, “the gains are going down.”

The average monthly lease payment for the most-leased car in America, the Honda Civic, was $251 in the first quarter, according to Experian.

But when Jonathan Stierwald, a Minnesota resident, wanted to lease a car for his nephew, he found Mike Piazza Honda in Pennsylvania willing to lease him the car for three years for just $80 a month. He flew there to get the deal. The lease was financed by Honda's finance arm.

The details of the deal could not be determined. A salesman at the Langhorne, Pennsylvania dealership, which is owned by Piazza, the former All-Star baseball catcher, said factors such as a high credit score and higher down-payment may have helped. Honda representative Steve Kinkade

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