Saturday, January 23, 2010

Car Dealers and Selective Credit

In December 1995, I went car shopping for a Ford.1995 was a year when Ford made many more cars than they sold, so I was prepared to make a good year-end deal. After getting a price quote, I sat down with a dealer to discuss terms.

We already had credit union financing, but Ford offered a much lower rate for buyers with good credit like us. Or did they? As I read the financing agreement (while they watched me impatiently) I saw that Ford did not guarantee that a buyer would get the low financing rate, but did guarantee that every buyer would be given financing. If you didn’t qualify for the good rate, Ford guaranteed that it would finance you at a very high credit card-type rate.

Ok, so Ford didn’t guarantee that a buyer would qualify for its best rate. Fair enough. However, Ford did not say what its best credit rating was based on. Third party credit score? Some formula of its own? Could be anything.

At the same time, when you, the buyer, signed the financing agreement, you agreed that if you did not qualify for the good financing rate, you must accept financing at the high rate. Once you signed the agreement, you could never back out of the deal for reasons of financing because Ford guaranteed financing at some rate.

Here was my question to the dealer: if I signed that agreement saying I was obligated to finance under Ford’s highest rate, what was Ford’s incentive for qualifying me under a lower rate?

He didn’t have an answer for that one. I didn’t expect him to.**

(By the way, given the high financing rates, is it any wonder car financing was the cash cow of the auto industry? Given that Ford (and presumably GMAC) guaranteed credit to everyone, is it any wonder that these financing entities struggled as much as any bank suffering from toxic mortgages?)

Now consider this:

Individuals and small businesses have always had two ways to get business financing in the open market. If you have good credit, you can get a low-rate loan direct from a bank. If you’re a bad credit risk, you have to resort to high-interest loans, including the very high credit card.

The line separating good and bad credit risk floats up or down depending on the economy. Right now it’s very high. Banks are not lending much, so fewer people can get direct bank credit.

In 2008, this was caused by the credit crunch. In 2010, the banks have received a flood of money from the government to loan, but they are not lending it out.

Why? We have seen the banks give out big bonuses, but consider another reason as well. Interest rates are unusually low right now, while credit card interest rates are unusually high—and big banks have both to offer.

So why should big banks lend to small businesses and individuals directly for less than 8% interest when they can make much more by denying credit and forcing people to finance on their bank cards for over 20% compounded interest?

Some of those people will go to other banks—just like I financed my car through my credit union—but some won’t. And those that don’t—or can’t—are making banks a lot of money.

I have a line of credit, and my balance has been about 20% of the total available. In late 2008, I got a notice from my bank that my line of credit was reduced unilaterally from the original amount available to slightly more than my balance. I had not missed payments or had any credit problems. It was “the credit crunch.” Fair enough.

But in early 2009, just a couple of months later, I got a notice that the credit limit on my credit card was being doubled.

It would seem we are experiencing a selective credit crunch.

**that dealer did other dishonest things too, and I'm happy to tell you the name of the excellent dealer we bought the car from after we left the chuckleheads described above. The good guys are: Person Ford in LaVerne, CA

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