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Honda exec: Long-term auto loans are "stupid"

by Drew Johnson

Long-term auto loans could ultimately hurt the industry.

The advent of long-term auto loans has helped the industry return to near pre-crash levels, but a top Honda executive warned on Tuesday that the practice of selling buyers on payment periods of up to 84-months in length could ultimately hurt the new car market.

As recently as 2010 car loans that stretched between 73 and 84 months accounted for just 10 percent of new car sales. Fast-forward to the end of 2014 and the share of long-term loans ballooned to greater than 25 percent as customers looked for ways to lower their monthly payments.

Although longer loans have boosted auto sales to 16.7 million units, that success could be short-lived as more buyers find themselves upside-down in their vehicle loans.

"You're ringing the bell on a new-car sale, but that customer is saddled -- they're stretched so thin,” John Mendel, Honda's U.S. sales head, told Bloomberg at the North American International Auto Show. Extended-term loans are "stupid not just for us, but for the industry.”

Buyers are using long-term loans as a way to offset increasing vehicle prices, but that method could also keep them out of the market for longer. The break even point is much longer on an 84-month loan even compared to a 60-month deal, meaning most buyers will still have negative equity when they are ready to trade up to a new model.

"It can have some negative impact on the market in creating a vicious cycle of negative equity if the consumer doesn't hold onto their vehicle long enough,” Melinda Zabritski, senior director of automotive finance for Experian, said. "Something has to be done to keep the market affordable, or consumer buying is going to have to change and we'll have to return to less frequent purchases.”

It may cost them some sales in the short-term, but Mendel says Honda will stick to more traditional 36- and 48-month loans.

"They're in equity, don't put any more money down, they get another car -- we call it keys-to-keys,” he said. "That's the kind of experience that really ingrains loyalty.”

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