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Industry Analysts Warn That Record Sales Levels are Unsustainable

Motor Trend logo Motor Trend 9/7/2014 Erick Ayapana

Car sales have been relatively good in recent years. Many automakers are selling at a pace that matches or exceeds pre-recession levels and total sales in the U.S. for 2014 are predicted to crest 16 million, last reached back in 2007. Some analysts, however, are worried the auto industry is headed back into trouble once again due to the return of risky practices.

Research

The Detroit News recently summarized the concerns voiced by analysts, who point to big discounts, longer loan terms, and an increase of lending to subprime and "deep subprime" buyers. audi-a6-allroad-with-quattro-coupe-5-million-sign© Provided by MotorTrend audi-a6-allroad-with-quattro-coupe-5-million-sign

According to the report, carmakers through July have spent an average of $2702 discounting each new car during the first seven months of this year. One analyst predicts that incentive spending will account for 9 percent of the average sales price for a vehicle and the expensive habit could cost the industry $5.2 billion per year.

Also concerning are the amount of loans being approved to subprime and deep subprime buyers, defined as those with credit scores lower than 620 and 550, respectively. These buyers are a costly risk to the industry because they have a higher chance of defaulting on loans. Experian reports that 15.1 percent of new vehicle loans went to subprime and deep subprime buyers during the second quarter of this year, compared to the 10.2 percent low reached at the peak of the recession. Experian points out that the number is still lower than the second quarter of 2007 when 19.9 percent of new car loans went to high-risk buyers. Additionally, buyers in both categories account for just 12 percent of total loans.

Another issue that's harmful to the industry is long loan terms. Lengthy loan terms benefit buyers by lowering monthly payments, but they hurt the auto industry by keeping those buyers out of the market for longer periods of time. According to The Detroit News report, 32 percent of auto loans are set for 72 months or longer, which is up from 23 percent in 2008. Also up are leases, which currently account for 26 percent of sales, compared to 18 percent back in 2008. The glut of vehicles coming off lease in a few years could significantly bring down the prices of used cars, making them more desirable than new cars. Chevrolet Cruze One Millionth At Lordstown Complex© Provided by MotorTrend Chevrolet Cruze One Millionth At Lordstown Complex

Analysts also warn car companies investing heavily in new plants to increase supply. The report points out that demand has peaked and is in decline, with sales growth growing to just 5.5 percent this year.

Source: The Detroit News, Experian

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