The US’s new Acima financing model is being rolled out across the US, and it could create the biggest crisis in the US car industry in decades.
The $5.9 trillion loan will be repaid in five years and the loan will only be available to new and current car buyers who can afford to pay it back, according to a Reuters story published on Wednesday.
The loan, first announced last week, is designed to address the growing cost of gas and insurance for consumers who are still struggling to afford their new cars, particularly those without significant down payments, according the Reuters report.
Reuters writes: A US automaker announced this week it will offer new and existing car buyers a new, higher-interest financing model designed to help cushion the economic impact of rising gas prices and rising insurance premiums.
The plan is the latest example of automakers seeking to make more money from their customers in a market that has been slow to recover from a global financial crisis and the Great Recession.
The new financing scheme is expected to allow for up to $5,000 of monthly payments to be forgiven if a buyer pays the loan off before they start paying for a new car, according, Reuters.
“We’re creating a new model for the future of the auto industry,” said John Delaney, chief executive of the Acima carmaker, in a conference call with analysts on Wednesday, adding that the loan is designed for consumers to take the time to look at the cost of cars, which are expected to rise by $3,500 to $9,500 a year.
Delaney said the new financing plan is being developed by an industry group called the Automotive Finance Group, a non-profit group that is run by the Ford Motor Co. The group is working on new loans to help reduce the impact of gas prices on the economy.
At the same time, Delaney said that new financing is being offered to those who can pay it off before buying a car, while the current loan plan, which was introduced last year, was only available to buyers who had an average down payment of less than $15,000.
One concern for the Acama group is that some borrowers might not be able to pay back their loans because they don’t have the financial means to repay them.
Another concern is that the new system could create new incentives for people to default on their loan.
In the US in 2017, nearly 80 percent of auto loans were for people who had down payments below $1,500, according Reuters.
The Acama Group’s new financing model will also allow buyers to borrow up to 80 percent more than the current $1.5 million down payment requirement.
But it’s also expected that the US auto industry will take a hit.
Bloomberg writes: The American Automobile Association, which represents carmakers, has said it expects the auto financing industry to lose $1 trillion in the next decade, with many of the largest automakers on the decline.
The association expects the industry to fall to $1 billion in 2017 and could drop to $600 billion by 2027.
The loss would leave the industry with about $1 to $2 trillion in debt.
The biggest losses would come from General Motors Co. GM, -0.00% and Ford Motor Corp. F, -1.06% , which would take in $5 billion to $7 billion in 2018 and 2019.
The auto industry’s $1-trillion-a-year market value is already about half of what it was in 2008, when the housing crash and financial crisis hit the industry hard, according as Bloomberg reported last year.