Weaker Consumer Credit New Challenge For Ford's Recovery
Story by Sam Haymart
New cars, new incentives, low rates but few qualified buyers.
09-15-08:Over the past year or two, the car companies have been struggling to get people into the dealerships. Now you have the big rebates, great financing rates, and some of the best cars in decades to choose from. But the new challenge to Ford, GM, and Chrysler is consumer’s credit. There is a rising demand for new cars and trucks out there, but dealers are now running into a problem where they cant arrange financing for their buyers.
Automakers have in-house lending such as Ford Credit, GMAC, and Chrysler Financial which have always been able to offer attractive terms to buyers like 0% financing or preferred leasing payments. Dealers also have a collection of independent banks in which they can place buyer’s contracts with.
When a buyer goes to a dealer, they typically run their credit and are able to easily place most customers into a loan program that works. Most dealers today even have banks that will accept customers with less than perfect or all-out bad credit.
The problem today is that a lot of people have had slow or late payments in the past year on their homes, credit cards or have even lost their homes to foreclosure. This by-product of the mortgage crisis of the past year has caused many people who had maintained good credit to now see much lower FICO credit scores.
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“I used to have 720 credit score, “ says Wade Milten, a fellow Mustang enthusiast. “I was able to waltz into the dealer with my head held high and buy anything they had, no questions, just sign on the dotted line. I cant do that anymore”.
Wade had a high paying in construction related job for decades but was laid off as a result of the real estate crash. He is getting back on his feet now with a new career, but in the wake of it all his home was lost to foreclosure and he had to file bankruptcy. His credit report had been clean for over a decade with high scores over 700, but now his score is in the low 500 range with several pages of wreckage. There is no more walking into the dealership with an easy purchase today.
With the failure of many banks and the tightening of the economy, most auto loan banks have severely raised the qualification standards. There are less and less loan programs available for people with less than perfect credit at a time when the number people with damaged credit is higher than ever.
All those 0% and low interest loans are not available to consumers unless they have impeccable credit, verifiable incomes, and low risk career models. Banks are becoming far more discriminatory on certain career sectors, self employed buyers, and first time buyers. Interest rates for people with low or no credit are significantly higher and often force them into much less expensive cars than they might otherwise be able to buy.
Furthermore, the raised standards are affecting even people who have better than average credit, who have not been late or have defaulted on their own loans. They may be subject to higher interest rates across the board.
Banks are bleeding in red ink and don’t want to take any risk. At the same time, they at some point need to loan money out or they wont make any. It is a vicious circle. In the meantime, automakers are bleeding because there are less qualified buyers. As the economic ripples continue, the automakers and banks will at some point need to find a middle ground or nobody is going to make money. Nobody is going to recover.
If you are in the position of having damaged credit, there are still ways to get a new car without losing your dignity or getting ripped off. There are a lot of national and local banks who specialize in bad credit situations like bankruptcy or foreclosure that utilize the internet to allow you to apply and get pre-qualified for a car loan before you ever go to the dealer.
This is a great way to know whether you are good to go and for how much before you ever have to meet a car salesman. Best of all you get the benefit of “saving face” at the dealership. Being pre-approved walking in allows you to negotiate your sale like a cash buyer. This eliminates placing yourself at their mercy to get you hung on a loan while they read over your dirty laundry, and use it as an embarassing negotiation weapon against you.
Keep in mind that loan programs for bad or challenged credit buyers have high interest rates. They can range from 14-23% for new or used cars and have low borrowing limits. You may be required to have a significant down payment as well as provide proof of steady employment. It all depends on the bank and your situation.
The best thing to do, is get all this information up front before you go shopping and be prepared for what your payment will be. You might be paying $500-600 a month for much less car than you hoped for, but keep in mind you are re-building your credit. There is a time when your credit will improve again. There is light at the end of the tunnel.
