Despite Heavy Demand, Honda Captive Discounts Civics

Fuel-efficient cars are in acute demand, and the Honda Civic is no exception. The Honda Civic Hybrid is, in fact, one of only two hybrid compact cars on the market.

Yet American Honda Finance Corp. is discounting Civics, even the hyper-popular hybrid model.

American Honda Finance is providing incentives on 2008 and 2009 Civics by offering annualized percentage rates of 4.99% and 5.49%, depending on the loan terms. That represents a discounting of 36 to 86 basis points on Civics, when compared to nationwide average interest rates, and even as gas prices are skyrocketing and waiting lists for hybrid cars lengthen.

American Honda Finance put the rates into effect in April; it has not changed them since. American Honda Finance, traditionally, is not a heavy user of financing discounts, particularly when compared to the Big Three.

“It is unusual for Honda to offer incentives in general,” said Chris Naughton, a spokesman for American Honda Motor Co. Inc., the finance unit’s parent.

Naughton surmised that the discounting was put in place because the new model year of Civics will be released soon, and the finance company is trying to help dealers get rid of their old model year inventory.

The sales volume of Civic Hybrids, in fact, dropped last month to 2,710 units from 3,246 units in June 2007, according to Automotive News data. That said, during the past six months, Civic Hybrid sales have been strong at more than 19,000 units, compared to about 17,140 for the same six-month period in 2007 – an 11% year-over-year increase.

Non-hybrid Civic sales, meanwhile, have been red hot. Last month alone, Honda sold slightly more than 37,200 Civic DXs, a 13.8% increase over sales in June 2007, Automotive News data showed. During the past six months, total Honda car sales were nearly 184,000, a year-over-year increase of 21.5%.

American Honda Finance Corp. was the fifth-largest auto finance company last year with about $45 billion of outstanding loans and leases in its portfolio.

There may be broader demand trends at play for Civics, suggested Kim Hill, an associate director at the Center for Automotive Research, a non-profit research enterprise. Hill agreed that consumers will increasingly want more fuel-efficient cars, but he believes that demand will spike for large cars that also happen to be fuel efficient.

“Companies are restructuring on the basis of fuel-efficient cars,” he said. “I think they will continue to search to build larger, more fuel-efficient vehicles, rather than completely downsize — and that adding luxuries, such as leather seats, will increase MSRPs [manufacturer’s suggested retail prices] and residual rates.”

Hill said that auto finance underwriters are now more concerned with the residual value on smaller vehicles, because they fear that consumers will abandon them for more-fuel-efficient large cars, when they hit the market.

“People are now driven to get out of their current leases on larger vehicles based on fuel-efficiency,” he said. “It is hard to measure the true demand [for compact cars] when it is in flux.”

—Victoria Fierson