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May Auto Sales Slip While Five-Year Loans Prosper

Last week was an interesting week in the automobile space. Top automakers reported declines in the number of cars sold, and auto loan financiers were highlighted for offering loans with historic terms in regards to how long they go out.

These issues show some of the headwinds that are facing the auto industries. The auto sector had been one of the positives that had been pointed to as an indication that the U.S. economy was improving. However, reports that indicate that the number of people who bought actual cars, not trucks and SUVs had dropped significantly. Those who were buying cars, or any vehicle for that matter, were financing loans for up to 68 months, which set a record.

The questions raised by these revelations create several questions, including:
Are consumers becoming more reluctant to purchase such big ticket items as vehicles?
Are consumers becoming less willing to part with their vehicles in fewer years than in the past, hence their willingness to sign up for loans that stretch out five years or more?

 · Auto industry and the economy

Auto sales are considered to be solid economic indicators in gauging how well the overall U.S. economy is performing. In light of the 2008 financial crash that led to bankruptcies in the auto sector, this indicator is extremely valuable in determining how well the U.S. economy is recovering.

We recently reported a story in which we noted that General Motors (NYSE: GM) ended up filing for bankruptcy in 2009 and received roughly $80 billion in government bailout money. Ford (NYSE: F)had to put up its Blue Oval as collateral for roughly $23 billion in loans it received from a syndicate of banks to keep it from filing for bankruptcy. That was in 2006, when the auto industry was in turmoil.

Automakers are recovering. Ford has its Blue Oval back and GM has paid back the government. The companies have reported growth in purchases of their vehicles, but their stocks have been range bound for the past five years. Ford has not managed to reach$18 a share; the closest it came was in 2014 when it traded around $17.42. GM has not been able to move above $50 a share. It nudged the number at the end of 2013 when it hit $40.99.

And while they are recovering, the issues noted above continue to hang a cloud over the industry.

 · A look at the numbers

So far this year, monthly auto sales have been mixed. The latest sales results released last week showed auto sales in the U.S. weakened in May. They were down 6% compared to May 2015.

May numbers show Fiat Chrysler (NYSE: FCAU) and Toyota beat estimates, while GM and Ford missed estimates. GM not only missed estimates, but it also so its sales drop in May.

Slowing production in North American and a decline in the estimated import of shipments played a role in the declines.

The month-to-month drop was not much above the typical April-to-May falloff, but could be a sign the industry will avoid a big summer sell-down of ’16 models prior to the start of the ’17 model year in the fourth quarter, according to WardsAuto.

 · So-called stretch-loans

As consumers search for ways to finance their vehicles, the so-called stretch-loans are becoming increasingly popular. In fact, last month marked the first time that the length of financing for such loans stretched out to 68 months. If you recall, these types of loans ran rampant during the Great Recession.

The theory that stretching your loan out longer could lower your payments is being proven to be incorrect. According to Experian, despite the longer terms, consumers are still seeing their payments increase. New loans during the first quarter of 2016 rose to $503 from $488 during the first quarter of 2015.

That can be chalked up to the average loan amount increasing to $30, 032, which is up from $28, 711 during Q1 2015.

CBS financial analyst Mellody Hobson in March warned of the ramification of auto loans that span more than five years. She said that consumers who pay for their vehicles over such a long period render them like homes, which can end up “underwater.” Furthermore, Hobson said that over the years, not only will these consumers end up paying more in interest, they also wind up with a car worth less than the payment they’re making.

Let’s hope that the next few months of auto sales will be stronger, reflecting the economy is regaining its footing due to consumer spending. If consumers are willing to spend on such big-ticket items as vehicles…even if it means financing them for more than five and a half years that could be a good thing. On that same note, it could be horrendous if consumers are buying things they cannot afford, as indicated with their willingness to accept longer financing terms. This could definitely create an economic situation rivaling the 2008 financial collapse.

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