Who Deserves Credit?

A lot of people who buy cars and buy them often need to take a time-out.

Otherwise, we are going to be a nation of debtors. We're getting close to that already.

Credit is a great thing. Our economy needs credit. It allows people to buy expensive items — such as cars and houses — without the unreasonable requirement of paying in full in advance. Believe it or not, in the old days it pretty much worked that way.

But we're in trouble when credit goes from being a helping hand to a ball and chain. That is happening now in many vehicle sales transactions.

“We've gone from a credit-dependent economy to becoming almost prisoners of credit,” says David Robertson, executive director of the Assn. of Finance and Insurance Professionals.

As a kid, he remembers his father shopping for a vehicle by looking for one that was reasonably priced, writing a check for almost the full amount and then driving that car “until it completely broke down or caught fire.”

But we've seen a major shift in how many average income earners buy cars today, says Robertson, a former dealership finance and insurance manager.

They are not paying much mind to price, he says. Instead, they are fixing on monthly payments.

“They say, ‘If I can get this baby, with all the latest features, I'm going to own it,’” says Robertson.

And they can get it, with an extended payment plan stretched like Silly Putty.

If the price of a desired car on the lot seems high, the cost can be made to seem more palatable with payments over, say, 72 months or, God forbid, 84 months.

And if long before those time periods expire the money owed on the vehicle is more than the vehicle is worth, well, something can be done about that, too. Just roll the negative equity into the financing of the next car purchase.

“Price is not the only consideration today, payments are,” Robertson tells the F&I Management and Technology conference. “If price were important, would someone buying a car be willing to roll $8,000 of negative equity into it?”

Of course, at some point the wheels come off.

That's because you can't keep financing car deals at 6- and 7-year loan cycles, while doing vehicle trade-ins at 3- and 4-year cycles, Robertson notes.

You must forego one of the trade cycles to catch up or there will be hell to pay.

“For people trading cars that way, there will be a reckoning,” he says. Being a consumer society that wants goods at any cost — as long as the cost is stretched wide enough — “has a price,” says Robertson.

So we need to tighten up on lending, and steer people into vehicles they can reasonably afford, not just ones they covet, with no concern to their financial limits.

It can be a dilemma for auto makers and dealers who want people to buy vehicles and options they might otherwise pass up, if payment plans didn't tempt them so.

That's not to say we should return to the days of paying cash on the barrel head. As Robertson says, “F&I is a key ingredient to buying a car.” It will remain so. But people shouldn't go bankrupt in the process.

A financially educated public is an ingredient to preventing so many car deals from going upside down.

Some industry initiatives offer workshops and pamphlets on responsible auto financing. Chrysler Financial, Toyota Financial and the National Automobile Dealers Assn. are among groups involved in such efforts.

They have work to do.

“We found that most consumers classified themselves as ‘novices’ or ‘apprentices’ when it comes to vehicle financing, and admit to feeling uninformed when it comes to that process,” says Eric Hoffman of Americans Well-Informed on Automobile Retailing Economics (AWARE).

Ignorance may be bliss, but it also can lead to 84-month vehicle loans, which ultimately can lead to financial grief.

Steve Finlay is editor of Ward's Dealer Business magazine. He can be reached at [email protected].