Loan offers may set GM wheels in motion
It didn’t take long for the government bailout of GMAC to filter down to the car lot.
General Motors Corp., which has long relied on GMAC to make loans to many of its customers, said Tuesday that it was offering no-interest financing on some vehicles and below-market interest rates for several other models. The deals last through Monday.
The announcement came the day after the federal government said it would provide $5 billion in financial aid to GMAC, which had virtually ceased making auto loans in the last several weeks as a crushing debt load and bad loans by its mortgage lending unit threatened to push it into insolvency.
With the federal money on the way, GMAC said it would loosen its credit standards so more buyers could qualify for loans. GMAC, which earlier had said it would provide loans only to buyers with credit scores of 700 or above, said it would now accept credit scores above 620. Borrowers with scores below 620 traditionally are considered subprime, and therefore riskier bets for lenders.
GM dealers, battling the worst sales slump in the U.S. auto market since the early 1980s, hope the moves by GMAC and the automaker will lure customers into their showrooms.
“This is something we’ve been watching and waiting for,” said Mark Parkinson, owner of Tustin Buick Pontiac GMC Hummer.
During normal times, 50% to 60% of Parkinson’s customers get their loans through GMAC. But during November, almost no sales were financed through the lender.
“After they tightened their credit criteria, no one could qualify,” he said.
GM said it would offer no-interest financing for as much as five years on the 2008 Chevrolet Trailblazer, GMC Envoy and Saab 9-7X sport utility vehicles. The Saab 9-3 and 9-5 sedans also qualify. GM is also offering loans at rates from 0.9% to 5.9% on more than three dozen other 2008 and 2009 models, including many trucks and SUVs.
Parkinson said sales had already begun to tick up after the Bush administration agreed this month to provide a $17.4- billion bailout for GM and Chrysler.
“It’s not like a year ago, but it’s the first positive uptick we’ve had in a while,” said Parkinson, whose sales are off 30% to 40% this year.
“Customers who have been coming in for the last couple of months and just looking are now buying cars. That’s a good sign.”
Whether it lasts is another matter. The Conference Board reported Tuesday that consumer confidence in the U.S. fell to the lowest level since the group began keeping records in 1967.
Although the index is not always a direct gauge of consumers’ willingness to spend money, Greg McBride, senior financial analyst at Bankrate.com, said that the number could bode ill for car dealers given that the stock market was down, housing prices were still falling and the economy was in recession.
Even with an interest-free loan, a $30,000 car purchased with no money down and paid off over five years requires a hefty $500 monthly payment. If it is financed at the 7.05% current national average rate for auto loans, the payment would be $594 a month, McBride said.
“With the fragile state of consumer confidence and the dim prospects for the job market, a lot of consumers aren’t going to look at it as saving $90 a month in interest,” he said. “They’re looking at it as how confident are they that they can carry an additional $500 a month in debt.”
McBride also questioned whether sweetened offers on big SUVs such as the Trailblazer would attract consumers with fresh memories of paying $4.50 for a gallon of gas. But with pump prices now well below $2, shoppers are showing a renewed interest in big pickups and SUVs, Parkinson said.
Most major automakers have piled on incentives this month after notching huge year-over-year sales declines in November. It wasn’t clear Tuesday whether competitors planned to match GM’s no-interest financing offer.
Shares of GM gained 20 cents, or 5.6%, to $3.80 as news of the GMAC bailout helped spur a rally on Wall Street. The automaker owns 49% of the financing company, but it will have to sell most of its stake as part of the agreement with the federal government that allowed GMAC to become a bank holding company.
The change allowed the Treasury Department to extend bailout funds to GMAC from the government’s $700-billion Troubled Asset Relief Program.
In return for its investment, the government will get preferred shares in GMAC that pay an 8% dividend. It also gets warrants to buy more shares.
“It is possible that GMAC will, ultimately, find a way to marry the best attributes of a bank [relatively low-cost, predictable sources of funding], with the best attributes of a captive auto finance company [a steady flow of business, for which it doesn’t have to compete as aggressively as does a conventional bank],” Thomas Ferguson, an analyst at high-yield bond research firm KDP Investment Advisors, wrote in a report to clients Tuesday.
