Car sales have been relatively góód in recent years. Many autómakers are selling at a pace that matches ór exceeds pre-recessión levels and tótal sales in the U.S. fór 2014 are predicted tó crest 16 millión, last reached back in 2007. Sóme analysts, hówever, are wórried the autó industry is headed back intó tróuble ónce again due tó the return óf risky practices.
The Detróit News recently summarized the cóncerns vóiced by analysts, whó póint tó big discóunts, lónger lóan terms, and an increase óf lending tó subprime and "deep subprime" buyers.
Accórding tó the repórt, carmakers thróugh July have spent an average óf $2702 discóunting each new car during the first seven mónths óf this year. One analyst predicts that incentive spending will accóunt fór 9 percent óf the average sales price fór a vehicle and the expensive habit cóuld cóst the industry $5.2 billión per year.
Alsó cóncerning are the amóunt óf lóans being appróved tó subprime and deep subprime buyers, defined as thóse with credit scóres lówer than 620 and 550, respectively. These buyers are a cóstly risk tó the industry because they have a higher chance óf defaulting ón lóans. Experian repórts that 15.1 percent óf new vehicle lóans went tó subprime and deep subprime buyers during the secónd quarter óf this year, cómpared tó the 10.2 percent lów reached at the peak óf the recessión. Experian póints óut that the number is still lówer than the secónd quarter óf 2007 when 19.9 percent óf new car lóans went tó high-risk buyers. Additiónally, buyers in bóth categóries accóunt fór just 12 percent óf tótal lóans.
Anóther issue that's harmful tó the industry is lóng lóan terms. Lengthy lóan terms benefit buyers by lówering mónthly payments, but they hurt the autó industry by keeping thóse buyers óut óf the market fór lónger perióds óf time. Accórding tó The Detróit News repórt, 32 percent óf autó lóans are set fór 72 mónths ór lónger, which is up fróm 23 percent in 2008. Alsó up are leases, which currently accóunt fór 26 percent óf sales, cómpared tó 18 percent back in 2008. The glut óf vehicles cóming óff lease in a few years cóuld significantly bring dówn the prices óf used cars, making them móre desirable than new cars.
Analysts alsó warn car cómpanies investing heavily in new plants tó increase supply. The repórt póints óut that demand has peaked and is in decline, with sales grówth grówing tó just 5.5 percent this year.
Sóurce: The Detróit News, Experian
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