By Ray Birch
ONTARIO, Calif.—Don’t expect the captive finance companies to back off their incentive offers. In fact, expect them to soon step up cash-back deals to address the growing number of trade-ins with negative equity.
Automotive industry expert Maryann Keller, speaking during CU Direct’s latest State of the Credit Union Auto Lending Market report, said fewer consumers are able to put cash down on their new cars today because they don’t have any equity in their current vehicles.
“The number of people who can come into the dealership and use the equity in their cars as a down payment is falling,” said Keller, principal at Maryann Keller & Associates and a former Wall Street auto industry analyst. “This is an issue.”
As CUToday.info has reported, analysts have pointed to the growing number of vehicles being traded in that have negative equity, due in large part to terms extending. Experts have shared concerns not only over the increasing number of negative equity trades, but the growing underwater dollar amounts.
“This will be one of the things shaping vehicle incentives going forward,” said Keller, who noted that the cash back will give borrowers with negative equity in their cars some cash to put down.
Steering Away From Leasing
Cash-back incentives on new car loans, said Keller, are also intended to steer buyers way from leasing, which hit record levels last year, claiming about 31% of all new car deals. As other analysts have noted, Keller said that the growing number of high-quality vehicles coming off lease is driving down residual values and therefore driving up the cost of leasing.
“The automakers are in business to produce cars and they will find ways to sell them. Even though dealers are awash with inventory they will keep building cars,” said Keller. “They don’t want to reduce their market share because that will hurt their companies in the stock market. So we will begin to see more cash on the hood from automakers to sustain their share.”
Cash-back deals, however, have long been the target of CU refinance offers, with credit unions telling members to take the up-front money and then come to the credit union later and refinance their loan at a lower rate.
What’s ahead for used cars? Keller said to expect used values to slide at a faster pace, but not at the pace predicted by Morgan Stanley. She said she does not buy into the thinking of the financial services firm that used car prices will fall from current levels by 50% by 2021. Keller explained that Morgan Stanley based its prediction on the fact new cars will eventually become much safer to drive than current vehicles, which will steer buyers away from older used cars.
“Realize that the used car market has a lot of self-correcting features,” said Keller. I think we are in for a period in which we will see some weakness—but I don’t subscribe to any dire forecast.”
Keller said that following post-recession years in which used values were strong due to low used inventory as people held onto their cars longer, that the used market has “cleared the peak and we will see more volatility in used values going forward.”
Keller added that as payment terms lengthen and negative equity builds, people will naturally hold onto their cars longer to “play catch-up,” which would affect used values.