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Tougher Auto-Lending Terms Compound Ford's Self-Driving Problem

Bradley Keoun

Ford Motor Co. , struggling to catch up to rivals in technologies like self-driving cars and electric vehicles, also faces a looming threat to its conventional auto sales: tougher lending terms.

Delinquencies on auto loans have trended up over the past five years, and lenders are responding by increasing minimum credit scores. Banks also have widened lending margins relative to their own funding costs, even as the U.S. Federal Reserve raises benchmark rates.

So far, analysts have seen few signs of tighter loan terms hitting sales at Ford and bigger rival General Motors Co. . Yet the prospect of higher monthly payments could lead more consumers to opt for used vehicles or eschew truck and SUV purchases, which tend to carry high profit margins for the automakers. The companies also may have to sweeten incentives such as rebates to offset higher borrowing costs.

"Over time, interest rates will increase, and we think that's going to start to put some pressure in general on the purchases and what consumers are buying," said Jeff Windau, an analyst at Edward Jones in St. Louis.

Ford's stock price has slid about 4.8% this year to $11.22, missing out on a rally of more than 9% in the Standard & Poor's 500 Index. GM's shares are roughly flat.

Last month, Ford appointed Jim Hackett, a former office-furniture executive, to replace Mark Fields, a 28-year veteran who had led the company since 2014. Hackett joined Ford in March 2016 as a senior executive overseeing the company's self-driving vehicle unit.

In a report earlier this month, Morgan Stanley analyst Adam Jonas predicted that Ford's earnings outlook may have to drop by as much as 50% over the next two years as Hackett retools the company, partly due to the cost of investments needed to turn modern vehicles into "mobile/digital platforms" that can collect and sell consumer data to tech firms. The stock could slide to $10 a share, from $11.31 currently, Jonas wrote.

That only complicates the challenge of tighter auto-lending conditions, which have been a big factor in sales historically.

Interest-rate cuts by the Federal Reserve in response to the financial crisis of 2008 drastically reduced consumer loan payments while rekindling an appetite for big-ticket purchases. Sales enticements including low down-payments, bigger balances and longer payback periods, in some cases exceeding six years.

During the first quarter of this year, total outstanding auto loans in the U.S. climbed to a record $1.17 trillion. That's more than 62% higher than the level at the end of 2009.

In an annual report earlier this year, GM's North American unit attributed its 1.7% sales growth for 2016 to "strong consumer demand driven by credit availability, low interest rates and low fuel prices."

Now, the loose lending terms are leading to higher delinquencies, with 0.67% of loans more than 60 days past due as of March, up from 0.61% a year earlier, credit-reporting firm Experian wrote in a report last week. 

S&P said in a report in May that auto lenders including Ally Financial Inc. and Santander would likely face lower profits as more loans go bad. Used-car prices have been falling, reducing the amount of money banks can get back when they sell a vehicle following repossession.

Wells Fargo & Co. said earlier this year that it was tightening auto-lending standards, starting with the least-creditworthy borrowers. According to Experian, customers with credit scores below 660 accounted for 25% of loans and leases on new autos, down from 27% a year earlier. 

The average credit score for new-vehicle purchases, meanwhile, has climbed to 717, a level not seen since 2013.

Windau at Edward Jones says some consumers may seek loans with longer terms to keep monthly payments manageable. Another option is to just buy a cheaper used vehicle. 

"As rates go up and lending terms tighten, consumers are going to be looking at alternatives to reduce costs," Windau said.

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