Credit crash puts drivers upside-down

By WARREN BROWN

WASHINGTON POST

WASHINGTON — Vehicles on display in the Washington Auto Show and in similar venues bespeak an environmentally green motoring future. But they also augur an era of financial brownouts for consumers.

The problem is twofold.

The easy-credit binge that left many homeowners with foreclosure headaches also has strapped many car buyers with long-term loans on depreciating assets. In auto industry parlance, that means many people are upside-down in their cars and trucks, owing more on them than those vehicles are worth.

The situation isn’t new. In many ways, it is the natural consequence of borrowing money to pay for something that loses value the moment it is put into use.

But auto dealers and manufacturers interviewed at the North American International Auto Show in Detroit earlier this month and at the recent Washington show say the problem is getting worse.

Traditional 36-month car loans are traditional only for consumers with the highest FICO auto loan credit scores, dealers say. That means people with credit scores of 700 and above and people able and willing to make hefty down payments, 18 percent or more, on their loans.

Such buyers are likely to retain greater equity in their vehicles at resale, meaning they are likely to recoup more of the original cost. That means those buyers will have more money to acquire a new car or truck with loan terms probably as favorable as those used to finance their original purchase.

But increasingly, consumers either are not qualifying for lower-interest, short-term auto loans or are opting for higher-interest loans, many of them running as long as 72 and 84 months, according to dealers and studies done by J.D. Power and Associates, a California industrial consulting, marketing and research development firm.

The longer loans are where the problem of being financially upside-down kicks in.

Luxury vehicles

Normally, luxury vehicles — premium brands such as Cadillac, BMW, Lexus and Mercedes-Benz — are the models that best hold resale value. But a Power study published in 2006, and now being updated, shows that 11.5 percent of the loans written for those brands were in the subprime category — long-term, high-interest loans given to buyers with credit scores of 650 and lower.

Compare that with the 25.5 percent share of subprime loans written for the buyers of economy and compact cars — models that usually are the quickest to lose their resale value, leaving their owners bereft of resale value.

But according to Power officials and auto dealers interviewed here and in Detroit, the auto business, particularly the retail segment, is not likely to experience the same trauma suffered by the housing industry in the subprime loan mess. It has something to do with the peculiarities of the auto retail industry and the nation’s overwhelming dependence on privately owned cars and trucks in times good and bad.

For example, contrary to public opinion, the biggest profit center in the average U.S. dealership is not the new-car showroom. That is why many dealers already are on a recession footing — trimming inventories of new cars and trucks and ordering fewer new vehicles.

The biggest revenue generators for car dealerships are used-car lots and repair service bays. Dealers, as a result, are stocking more used cars and raiding one another’s repair shops for highly skilled, or at least highly trainable, technicians.

A key event of the Washington Auto Show was a career day for several hundred District of Columbia high school students. Dealerships from all over the Washington metropolitan area — joined by General Motors and Toyota — made earnest pitches for students to consider careers as automotive technicians and service advisers.

Luckily for auto retailers, most employable people, regardless of their credit situation, still need a car or truck to get to work. Many of them, like it or not, will have to acquire that ride through what are now called subprime loans. Financial pressure will force them to hold on to those cars and trucks longer, meaning they eventually will have to visit those repair bays.