The Wall Street Journal - 02.10.2019

A10| Wednesday, October 2, 2019 THE WALL STREET JOURNAL.**

The dealership in St. Joseph, Mo., where Deven Jones, below, bought a new car, along with a loan that cost more than $500 a month.

BARRETT EMKE FOR THE WALL STREET JOURNAL (2)

2015, auto sales had reached

records.

Low rates, in effect, served

as a bailout for the entire auto

industry. Last year, investors

bought a record $107 billion of

bonds backed by cars, accord-

ing to the Securities Industry

and Financial Markets Associa-

tion, a trade group. That is the

first issuance record since

2005 and nearly triple the

amount two decades earlier.

The outstanding pile of auto

bonds swelled to a record $

billion.

So far this year, dealerships

made an average of $982 per

new vehicle on finance and in-

surance versus $381 on the ac-

tual sale, according to J.D.

Power, a data and analytics

company. A decade earlier, fi-

nancing brought in $516 per

car and the sale made dealers

$837.

To see these shifts up close,

visit a dealership’s finance of-

fice. Dealers call it “the box,” a

reference to the holding cell to

which Paul Newman’s character

was sent in the 1967 movie

“Cool Hand Luke.” Since most

buyers borrow to pay for their

cars, it falls on the finance

manager to figure out a man-

ageable payment schedule.

The dealership commonly

holds on to a portion of the in-

terest rate, typically between 1

and 2 percentage points, or

gets a one-time payment from

the lender. The dealer also

pitches high-margin add-on

services, such as extended war-

ranties and insurance for dings

and dents, which are rolled

into the loan.

Adding add-ons

When potential buyers enter

Petrov Degand’s office at Earl

Stewart Toyota in North Palm

Beach, Fla., he walks them

through each add-on, present-

ing the full menu of options, he

said. He has seen finance man-

agers quote a price in which

the add-ons are already bun-

dled into the loan amount to

increase the bottom line, a tac-

tic known as “packing the pay-

ment.”

Jose Mercado agreed to buy

a series of add-ons, including

an extended warranty, for his

new RAV4 midway into his

fifth hour at a Toyota dealer-

ship this spring. Mr. Mercado,

41, who lives in Blackwood,

N.J., and works in a chocolate

factory, had spent the previous

six months reading reviews

and figuring out how much he

should pay for the car.

He found himself unpre-

pared for the hard sell from

the finance manager. The add-

ons brought his payment to

$448 a month, nearly $

more than he had expected to

pay when he walked in to buy

hisfirstnewcarin18years.

“I wish my research would

have been deeper to be more

ready,” he said.

Finance managers at dealer-

ships typically use an elec-

tronic portal to hash out the

terms of the loans. On the

other end are various financial

institutions that buy up the

loan pretty much as soon as

the dealer closes the deal.

Banks and credit unions are

big lenders, as are the finance

arms of major car makers.

Some of these lenders shunned

riskier subprime borrowers af-

ter the financial crisis, fueling

the growth of independent

nonbank auto lenders.

Westlake Services LLC is

among the biggest. Its owner,

billionaire Don Hankey, started

lending four decades ago when,

as a dealer, he realized sub-

prime buyers needed some-

where to get their financing.

Westlake is still focused on

these borrowers, but it has

pursued more creditworthy

customers as it has grown in

recent years.

‘I got ‘em’

Westlake needs to make

sure the monthly payments on

its auto loans keep flowing.

Late borrowers can expect calls

from the company immediately.

Roughly 40% of its employees

focus exclusively on collecting.

In mid-April, a representa-

tive who handles the most-dif-

ficult cases called a past-due

borrower to iron out payment

on a 2018 Toyota RAV4. The

borrower had struggled to

keep up with a payment of

more than $800. The car al-

ready had been repossessed

from the borrower once.

The Westlake representative

switched between English and

Spanish. He offered an exten-

sion on the March payment,

meaning it wouldn’t be due un-

til the end of the loan in 2024.

But he collected nearly $

on a partial payment for April

over the phone. Borrowers are

less likely to resume payments

if they stop altogether.

After hanging up, the repre-

sentative rang a bell at his

desk. “35K,” he called out, re-

ferring to the balance of the

loan that was no longer consid-

ered seriously delinquent. “It

took a while but I got ’em.”

Across the industry, delin-

quencies have trended higher

in the past few years, but they

haven’t surged like mortgage

delinquencies did during the fi-

nancial crisis. Investors have

been largely content to buy

lenders’ auto bonds as they

search for returns in a low-rate

world. Losses are significantly

higher when loan terms

lengthen, according to S&P

Global Ratings.

Mr. Jones, in Missouri, got

his loan from Honda’s financ-

ing arm, which pools a large

portion of its loans into bonds

that it sells to investors. A

$1.25 billion sale from late

2017 contained more than

7,000 loans tied to 2017 Ac-

cords like the one Mr. Jones

owns, according to loan-level

data.

The investors who hold Mr.

Jones’s loan are still getting

paid because he has remained

current. Mr. Jones took on

more overtime shifts at the

plastic factory where he works

as a machine operator. A raise

and a bonus helped get him to

stable ground. Still, he will be

making payments for years to

come.

Mr. Jones said he doesn’t

plan to take out another auto

loan soon. “Even just signing

the paper, not even driving the

car off the lot, suddenly I’m

underwater,” he said.

—Shane Shifflett contributed

to this article.

ter before the financial crisis.

Americans have been bor-

rowing to buy their cars for de-

cades, but auto debt has

swelled since the financial cri-

sis. U.S. consumers held a re-

cord $1.3 trillion of debt tied to

their cars at the end of June,

according to the Federal Re-

serve, up from about $740 bil-

lion a decade earlier.

As the global financial sys-

tem flirted with disaster more

than 10 years ago, two of the

big three U.S. auto makers re-

ceived government bailouts

and restructured their debt in

bankruptcy. The industry

emerged into a battered econ-

omy when consumers hardly

had the cash to go car shop-

ping.

Yet for the auto industry,

there was a silver lining: Inter-

est rates had fallen to practi-

cally zero. Suddenly, it was

much cheaper to finance a car.

Loans made to buyers were

snapped up by Wall Street in-

vestors looking for returns as

income from supersafe Trea-

surys drifted toward zero.

The combination of rock-

bottom rates and yield-hungry

investors helped bring the U.S.

auto industry back to life. By

Autoloanterms*

2009 ’11 ’13 ’15 ’17 ’

100%

80

0

20

40

60

Autoloansareincreasinglygettingstretchedouttokeeppaymentsmanageable.

WallStreetinvestorshave

snappedupcarloanspackaged

intobonds,reshapingthe

automobilemarket.

Agrowingshareofbuyers

won'tpayofftheirdebt

beforetradingtheircarin

foranewone.

Dealersmakemoremoney

oncarloansthanthecars

theysell.

Averagedealerprofit

fromanewvehiclesale†

$

0

500

1000

2009 ’ 11 ’ 13 ’ 15 ’ 17 ’ 19

Financing and insurance

Vehicle gross

Autoloans-backed

securities**

0

$100 billion

2009 ’ 11 ’ 13 ’ 15 ’ 17 ’ 19

$300 billion

0

100

200

2009 ’ 11 ’ 13 ’ 15 ’ 17 ’ 19

Issuance

Outstanding

Shareoftrade-Inwith

negativeequity‡

35

15

20

25

30

%

2009 ’ 11 ’ 13 ’ 15 ’ 17 ’ 19

85ormoremonths 73-84 61-72 49-60 37-48 1-

Stretched-outDebt

Source: Experian (loan terms); J.D. Power (dealer profit); Edmunds (trade-In); SIFMA (securities)

*For new cars only, as of the end of June 2019 †Through August 2019 ‡2019 figure as of end of June **2019 figure as of end of June

WORLD NEWS

cle by spreading the debt over
longer periods. Wall Street in-
vestors snap up these loans,
which are bundled into bonds.
Dealers now make more money
on the loans their customers
take than on the cars they sell.
For many Americans, the
availability of loans with longer
terms has created an illusion of
affordability. It has helped fuel
car purchases that would have
been out of reach with three-,
five- or even six-year loans.
“People can get into very ex-
pensive cars,” said Bronson Ar-
gyle, a professor at Brigham
Young University in Provo,
Utah, whose research focuses
on consumer credit. “House-
holds are taking on, on aver-
age, more risk.”
Deven Jones walked into the
Rolling Hills Honda dealership
in St. Joseph, Mo., in early
2017 after a salesman emailed
him and said he might be able
to buy a new car for less than
$400 a month.
Mr. Jones, now 22 years old,
walked out with a gray Accord
sedan with heated leather
seats. He also took home a 72-
month car loan that cost him
and his then-girlfriend more
than $500 a month. When they
split last year and the monthly
payment fell solely to him, it
suddenly took up more than a
quarter of his take-home pay.
He paid $27,000 for the car,
less than the sticker price, but
took out a $36,000 loan with
an interest rate of 1.9% to
cover the purchase price and
unpaid debt on two vehicles he
bought as a teenager. It was
particularly burdensome when
combined with his other debt,
including credit cards, he said.

Loan sizes soar

Just 18% of U.S. households
had enough liquid assets to
cover the cost of a new car, ac-
cording to a Wall Street Jour-
nal analysis of 2016 data from
the Fed’s triennial Survey of
Consumer Finances, a propor-
tion that hasn’t changed much
in recent years.
Even a conservative car loan
often won’t do it. The median-
income U.S. household with a
four-year loan, 20% down and
a payment under 10% of gross
income—a standard budget—
could afford a car worth
$18,390, excluding taxes, ac-
cording to an analysis by per-
sonal-finance website Bank-
rate.com.
But the size of the average
auto loan has grown by about a
third over the past decade to
$32,119 for a new car, accord-
ing to Experian. To keep pay-
ments manageable, the car in-
dustry has taken to adding
more months to the end of the
loan.
The average loan stretches
for roughly 69 months, a re-
cord. Some last much longer. In
the first half of the year, 1.5%
of auto loans for new vehicles
had terms of 85 months or lon-
ger, according to Experian. Five
years ago, these eight- and
nine-year loans were practi-
cally nonexistent.
As a result, a growing share
of car buyers won’t pay off the
debt before they trade in their
cars for new ones, either be-
cause the car is in need of re-
pairs or because they want a
newer model. A third of new-
car buyers who trade in their
cars roll debt from old vehicles
into their new loans, according
to car-shopping site Edmunds.
That is up from about a quar-

ContinuedfromPageOne

Car Buyers

Lean on

Financing

to see the sun rise on Nov. 1

on a free country,” said Con-

servative lawmaker Mark

Francois, to loud applause.

John Redwood, a Conserva-

tive lawmaker who has cam-

paigned against the EU since

1975, said people in the U.K.

don’t want to be “slaves” to

the bloc’s rules.

The event on the fringes of

the Conservative Party confer-

ence is a reminder of the his-

tory of anti-EU sentiment in

the party. It was organized by

the Bruges Group, a think tank

formed in the months after a

1988 speech by Thatcher in the

Belgian city in which she

warned of a European “super-

state.” It also carries a mes-

sage for the future: Even if Mr.

Johnson secures a deal with

the EU, he faces a struggle to

get lawmakers to back it.

The people in the room are

ostensibly allies of Mr. John-

son, who has staked his politi-

cal fortunes on delivering

Brexit by the end of October.

But many of them are likely to

vote against any new deal the

prime minister brings back

from Brussels.

Meanwhile, opponents of

Mr. Johnson in Parliament,

where his government is in a

minority, have closed off the

alternative: a British exit with-

out a deal.

At the annual gathering,

members of Parliament are

broadly united behind Mr.

Johnson’s desire to get the

U.K. out of the EU.

But there the unity ends

and lawmakers fall into two

camps: those who advertise

their Brexit credentials by say-

ing they have voted three

times for the deal negotiated

by Mr. Johnson’s predecessor,

Theresa May; and those who

show off their Brexit creden-

tials by saying that they voted

against it repeatedly—because

it kept the U.K. too closely tied

to the EU. The latter group

comprises around 20 Conser-

vative lawmakers who call

themselves “the Spartans.”

This divide has ruptured

the party. Last month, 21 law-

makers were expelled for vot-

ing for a law that forces the

prime minister to ask for a

Brexit extension beyond Oct.

31 if a deal with the EU isn’t

sealed by Oct. 19.

The split has been visible at

the party’s annual get-to-

gether, where the rival fac-

tions have jostled for attention

at a host of events. At the

comedy club, Conservative ac-

tivists booed when the names

of some of the 21 rebels were

mentioned.

Some rebels thrown out by

Mr. Johnson still turned up to

the conference to argue that

an abrupt split with the EU

would be economically damag-

ing and politically perilous.

“The worst outcome for us is

leaving without a deal,” said Da-

vid Gauke, former justice secre-

tary and one of those ejected

from the parliamentary party, at

an event Tuesday.

Mr. Gauke said he thinks an

extension is inevitable as Par-

liament won’t permit Mr. John-

son to pursue a no-deal split.

Healing the party’s fissure

and delivering Brexit will be

complicated and perhaps im-

possible, analysts say. Mr.

Johnson must present a pro-

posal different enough from

Mrs. May’s to persuade some

of his party’s Spartans to vote

for it, while not veering so far

away from her deal that the

EU rejects it out of hand.

MANCHESTER, England—
Boris Johnson’s Brexit prob-
lem was laid out this week in a
dimly lighted comedy club in
this northern English city.
As the British prime minis-
ter prepares to present a re-
vised divorce proposal to the
European Union in coming
days, more than a hundred
people gathered in a room dec-
orated with a photo of Marga-
ret Thatcher to hear and cheer
Conservative lawmakers who
are adamant the U.K. should
leave the bloc at the end of
this month without a deal.
“I want nothing more than

BYMAXCOLCHESTER
ANDJASONDOUGLAS

U.K. Tory Gathering Reveals Split on No-Deal Brexit

FROM PAGE ONE