Where credit is due

More than two years ago now, I began citing a story in the Los Angeles Times about how strange things had become with regard to financing a car or truck. In the story (12/2007), a couple had traded-in their 2001 Suburban toward the purchase of a new F-350 pickup truck. The irony of the story is that they still owed roughly $9,500 against the suburban, and paid nothing down in the transaction. In other words, they drove away from the dealership owing more than $44,000 on their new pickup truck, the sum of debt between the two vehicles.

Extreme? Perhaps. But in 2008, the average car loan was 60 months. And 45% of all car loans were for terms of six years or longer.

But that trend could be shifting. From the first quarter of 2008 to the 2009 first quarter, the number of new auto loans plunged 40.5 percent, according to an Associated Press story that appeared in today’s Minneapolis Star Tribune. The story went on to say that the average auto payment fell nearly 9 percent, to $361 from $395 a year ago.

The bills are coming due, and more consumers seem to be having difficulty making all the payments. The Star Tribune story indicates an increase in debt defaults on a variety of fronts. In the first quarter, 0.83% of car loans were at least sixty days late (up from 0.65% a year earlier). 5.22% of mortgage holders were two months late, and the delinquency rate for bank-issued credit cards rose 11 percent from last year, to 1.32 percent for January through March.

Implications: The de-leveraging of the consumer is not entirely the will of that consumer. There comes a time when the consumer simply cannot find anyone to roll-up ever higher levels of debt into a new purchase. The dealership and the consumer have both begun to realize that they’re not just financing a car; that both the consumer and the dealership might be mortgaging their futures. When so many consumers so up-side-down in debt, their ability to buy a car in the years ahead is impaired, just as dealership and/or lender has diminished their ability to sell to that debt-laden group.

Are you prepared for a return to the day when ultra-qualified buyers were treated like royalty? Circumstances may be in place for the return to a marketing scheme that places premium attention on well-qualified buyers. Special incentives, customer rewards, value-added services?

In a world where customers with outstanding credit ratings might be harder to find… accept that they might also be harder to keep, due to the more competitive selling atmosphere that now obviously exists. Just as the forces of Supply & Demand can influence the value of the product or service you sell, it can dictate the value of qualified buyers. The shorter the supply of qualified customers, the more valuable each one becomes.

Mike Anderson