This weekend I stopped in and talked to a friend of mine who is a GM at a large Chevy dealer. He told me that he has been turning away a ton of people because he just cannot get financing. He said that last week, Suntrust changed all their auto financing. Basically, rather than considering MSRP 100% of the loan, they now consider the selling price (MSRP-manufactuer rebates and dealer discounts) as 100% of the loan. So if you go in to buy a $50K Tahoe with $10K in rebates...Suntrust is only willing to finance $40K. That means no rolling negative equity...which has been a major tool GM dealers have used to get people in SUV's.

While it is something that makes a lot of sense for a bank to do..both morally, and business wise...this could be a big problem for GM if more banks adopt the policy.

 

We've got to go through a deep lending correction. Its going to hurt, but like you said, its the right thing to do morally and business wise. When we bought my wifes Ion we rolled the sales tax into the purchase price and financed 100%. Its a lease that we turn in in a few months, but its been $5,000-7,000 upside down most of the time we've owned it if we wanted to get rid of it early. If we would have let it go to repossesion at any point, GMAC would have lost big.

 

The credit issue is going to be a bid deal for every manufacturer/dealer.

However, this is as it shoudl be.

Buying a new car is already a bad financial decision.

Financing it makes it worse.

Financing 100% for five or six or seven years off the scale bad news.

Rolling negative equity into the deal is so bad it's difficult to find a word that describes how bad it is...it's a trap that is very difficult to get out of; for both the dealers and the consumers but it's a habit that people need to break themselves of.

 

Doesn't that mean that the customer will end up paying a lot less in the long run?

 

no. they basically pay the same amount the only difference is is not the dealers do not have nagotiation room to sell the vehicles. the bank says that the vehicle worth is the sum of the MSRP, minus all rebates. The bank knows what they are, so they are only going to give out that much money. So if a dealer wants to finance it, they can not really bargain anymore, and if they do, they have to start at the price where normally they would end... This could hurt them, but in the end, it is just good business sense for the banks.

(at least thats what I read out of that.)

 

The auto industry will very quickly find out that many - maybe even the majority of - new car sales are "wants", not "needs". The median household income is about $48K, while the average new car price is $29K. That's a lot of money to be spending every four years on a depreciating asset, and I suspect that buying habits are going to change in a very painful manner.

Offering loans to upside-down buyers was a house of cards that was destined to collapse. If the guy walking in off the street didn't bother to pay off his current vehicle, what made anyone think that he'd have a change of heart and pay off his next loan? I saw a stat several weeks ago claiming that about 35% of all purchases of new pickup trucks involved a buyer with an upside-down trade-in. Frickin' unbelieveable

The credit crunch isn't just affecting buyers; now, dealerships are finding it much tougher to get floor plans for inventory.

 

I never understood how people could afford new pick-ups in the first place! The obvious answer was, they couldn't. I don't think the Big 3 or anyone else should be surprised by this. This is going to hurt, but it'll help in the long run. People have been careless, myself included, and the industry has been careless. Times they are a 'changin'.

 

My wife and I are both engineers, and we make, shall we say, decent money. We live in a 1100 sq. ft two-bedroom house (don't need anything bigger for two people). You can see the sort of cars that we buy.

Now, if my truck was truly worn-out, then I'd consider buying a new one. But it's not, despite 103,000 miles and 12 years of use (maintenance is a wonderful thing!). A new truck for me would be a luxury, not a necessity, and it's not something I'm going to indudge in despite the fact that I'm in a far better position to do so than most new-car buyers.

 

Your children are doomed to be little Dilberts and Dilbertas.

I agree with you on your car buying view (despite my sig line). I still don't believe in buying new, simply because I could buy a 2 year old model for 2/3 the price. Didn't work out this time because I needed a car *now*, and a couple days of cruising ebay/craigslist/forums didn't turn up anything that I wanted and could drive year round. I plan to get a lot of use out of it though. If I can put 56,000 miles on a $1,800 beater, I'm hoping I can put many many more miles on a new car.

 

This is going to kill the local Kia dealer. They are always advertising how they can roll upto $10,000 in negitive equity on a new Kia.

 

I have never understood paying vehicles off. Most people who are the types to buy a new car will want a new one by the time they pay it off anyway. So basically, you drive a vehicle for 5 years, pay it off..and then as soon as the payment goes away you get an itch for a new one and get a new payment right back. So basically, you kept a car two years out of warranty to just pay it off and get a new one. Again..this applys to people who buy new cars all the time. There are the "drive the wheels off it" types...but they often buy used cars to begin with. Really up untill now that GM Smart buy was the best thing going. We needed something more heavy duty..so we traded my wifes Equinox in for an 07 Avalanche. They figured a residual of 55% after 48 months. The truck had a sticker somewhere near $50K...meaning they figured the payments so that we paid the car down to where in 4 years we would owe $27500 when they took it back. We got $8K off the truck, which we used to bury the sales tax and like $3K in negative equity. With the Smart Buy in 4 years I can give them the car back and walk away with no negative equity...which is looking pretty awesome considering the thing has a KBB blue book trade in the mid $20K's after one year.

 

With the recent dive in resale in full size trucks and SUVs, a lot more than 35% are going to be upside down in their vehicle. Dealers in Florida are offering 50% off of new crew cab 08 Dodge pickups. 40% from Chrysler and another 10% from the dealer. What does that do to the value of an 06 or 07 Dodge Ram? Used vehicle prices are going down faster than they can be reported, and the book value on them is not accurate. Many dealers now value a trade in at the price a wholesaler will give them for that vehicle on that day.

 

They made the deal on the 07 Avalanche before the bottom fell out on the market with SUV's. It may have been profitable at the time, but sounds like a really bad deal for the dealer to me.

But paying off cars and driving them for a few years afterward is a good way to go. Having negative equity in a car is never a good position to be in.

 

After watching you roll through vehicles during my years on this forum, this much is clear

These people treat cars like a $500/month fashion statement. I consider them to be suckers, but they also keep me employed.

That says quite a bit. Just out of curiousity, have you ever added up all the negative equity that you've generated?

Leasing makes (or at least made) a lot of sense when residual values were high. With the crashing residuals of trucks and SUVs, this option is pretty much off the table for the immediate future.

 

True..but I pay my own way. Aside from my GTO (which is paid off), I have not come across a vehicle I am interested in keeping long term. Then again they are a big part of my life..not just an appliance. This all may change since we seem to be at the end of this performance era. Might be time to sit on some things.

Correct...if everyone was concerned about what vehicle and method of purchase was the best value...there would basically be no new car industry in the US.

Not really. I look at it this way...negative equity is not such untill you actually pay that money. While there have been a few times I have had to pay my way out of a mess because I had the "I wants"...I have been smart with deals like the Avalanche. People say..but why pay on a car and give it back after 4 years. The fact of the matter is..after 4 years I will be tired of it anyway...and have to trade in a car that has lost 70% plus of it's value. I would rather do something like a Smartbuy, where I have smaller payments and just give it back.

Obviously these opportunities will no longer be there...but aside from the Camaro..and G8..there are many less "Gotta Have" vehicles on the horizon also..[QUOTE]