Some Fear Auto Industry Returning to Bad Habits

Big discounts. Six- or seven-year loans, in some cases to buyers who would have been turned down in the past.

As the auto industry strives to sustain its post-recession comeback, car companies are resorting to tactics that some experts warn will lead to trouble down the road.

Vehicle discounts have risen 5.5 percent from a year ago. More than a quarter of new buyers are choosing to lease, a historically high percentage. Auto company lending arms are making more loans to people with low credit scores. The industry is adding factory capacity. And the average price of a car keeps rising, forcing some customers to borrow for longer terms to keep payments down.

Annual auto sales in the U.S. should top 16 million for the first time in seven years. But the pent-up consumer demand that has driven sales is ebbing. Sales are predicted to grow 5.5 percent this year, the slowest pace since the financial crisis.

The big discounts and other steps eventually should help push sales above 17 million, most experts say. But Honda Motor Co. U.S. sales chief John Mendel last week scolded competitors for using "short-term" tactics such as subprime loans, 72-month terms and increased sales to rental car companies to pad their sales.

"We have no desire to go there," said Mendel, whose company's sales through July have fallen 1.3 percent, trailing the industry.

Some on Wall Street see a price to pay.

"It could be a disaster later on," says Morgan Stanley analyst Adam Jonas. "We're clearly robbing Peter to pay Paul." He sees sales growing to an annual rate of 18 million in 2017 — then sinking to 14 million a year later. That will mean factory closings, restructurings, and thousands of job cuts just for companies to break even.

Not all forecasts are that dire and no one — not even Jonas — is predicting a repeat of billion-dollar losses and cars piling up on dealer lots. Automakers have cut costs and are better positioned to handle a downturn than they were in 2008 and 2009.

Still, easier credit brings back not-so-fond memories for at least one auto dealer.

"It just seems like 2007 all over again," said veteran Toyota dealer Earl Stewart of North Palm Beach, Florida. "The credit ease with which people are financed is as liberal and loose as it ever was."

Among the numbers that concern some experts:

— $2,702: Average discount per new car through July. They're heaviest in two segments: Midsize cars (up almost 21 percent through July) and compacts (up 10 percent). Automakers need to move the cars because a lot of factory space is committed to building them.

— 12.7 percent: The year-over-year increase last quarter in auto loans to "Deep Subprime" buyers — those with credit scores lower than 550. Loans to "subprime" buyers (credit score lower than 620) rose 5.3 percent, according to Experian. Combined, both are just over 12 percent of all auto loans. Those with lower credit scores generally have a higher default risk.

— 32 percent: Percentage of auto loans that are 72 months or longer, up from 23 percent in 2008, according to LMC Automotive. Dealers can offer longer loans on expensive cars, making the payments seem reasonable. But those loans are loaded with interest early on, so it takes a long time for buyers to pay principal and build equity for a trade-in, says Greg McBride, chief financial officer at Bankrate.com.

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