Automotive News - December 1, 2008 - (Page 26) 26 • DECEMBER 1, 2008 INSIGHT Lenders to car buyers: Better lay more money down Rosland B. Gammon autonews@crain.com “Don’t walk in empty-handed” is the new message that lenders have for consumers heading to dealerships. “Lenders want you to have a finan- cial stake,” says George Ponko, general manager of Russ Darrow Honda in Milwaukee. “The more you put down, the less likely you’ll walk away.” Faced with higher repossession rates and less security in the financial markets, lenders have revised their loan practices and forced consumers to have a bigger stake in loan deals. Those changes coupled with negative equity in trade-ins helped boost the average amount of down pay- ments on vehicle purchases by 23 percent, to $3,024, in October vs. $2,465 a year earlier, according to data from Edmunds.com. In percentage terms, consumers’ down payments covered 19.3 percent of the purchase price in October, up from 17.4 percent in January, according to the Power Information Network, a division of J.D. Power and Associates. Repricing risk “The credit markets are repricing risks,” says Greg McBride, senior financial analyst with Bankrate.com. “Credit was too easy, and now they’re paying the price with increasing defaults.” Chase Auto Finance tightened its lending standards by increasing down-payment requirements and limiting extended terms and high loan-to-value deals, says spokeswoman Mary Kay Bean. Loan originations have dropped 27 percent, she says. “Our focus is on affordability,” Bean says. “We want to make loans borrowers can repay.” Toyota Financial Services also reduced its number of high loan-tovalue deals, some of which could have loan amounts as high as 110 percent of the vehicle’s value to help cover negative equity, says spokeswoman Kerry Rivera. Keith Leggett, senior economist for the American Bankers Association, says loan-to-value ratios dropped from 94 percent in January to 85 percent in September as banks sought to decrease defaults. “They’re being conditioned by the state of the economy,” he says. “We will find that larger down payments will become part of the new world.” McBride says he doesn’t expect the amount that lenders request to change much, but he agrees that the days of “no money down” are over. “Borrowers need to bring more than just a smile to the table,” he says. down 15 percent, says Jesse Toprak, executive director of industry analysis with Edmunds. Buyers with scores below 600 could see downpayment requirements of 20 percent or more, he says. In October, GMAC Financial Services said the lender would work only with consumers who have credit scores of 700 or higher. But even consumers with good credit scores face problems as negative equity in their trade-ins forces them to hand over more money to purchase vehicles. The average amount of negative equity rose to $4,506 in October from $4,295 in January, according to Edmunds data. But the actual number of negativeequity transactions dropped because owners couldn’t get the financing, says Tom Libby, senior director of industry analysis for the Power Information Network. American Honda Finance Corp. has not changed its financing terms to require larger down payments across the board, but consumers hurt by the value of their trade-ins have had to put down more money, says Honda spokesman Chris Martin. “If they’re buying a $30,000 car and owe $10,000 on the other vehicle,” he says, “they have to come up with $10,000 from somewhere.” Lost sales Negative equity and larger downpayment requirements have hurt business at Belle Glade Chevrolet in West Palm Beach, Fla. General Manager Jim Weisbecker says the dealership has lost about half its negotiated deals because of changes in financing. In Milwaukee, Ponko, of Russ Darrow Honda, says his store also has had customers unable to get financing. He estimates business has dropped about 10 percent in the past quarter. Russ Darrow Jr., CEO of Russ Darrow Group Inc., sees banks as contributing to customers’ financing problems. Part of the down-payment push, he says, stems from banks collecting bailout money without increasing loans to consumers. “Banks getting money are using it to repair their balance sheets and using it to purchase weaker banks,” Darrow says. “That was not one of the intentions of the whole thing. It’s having a significant effect on us.”c IF NOT, THEN YOU AREN’T PARTNERED WITH ONE OF THE FASTEST GROWING SERVICE CONTRACT PROVIDERS IN NORTH AMERICA INTERSTATE NATIONAL DEALER SERVICES. Our stars are perfectly in line with exciting products including our re-energized Hi-Road and a Missed Opportunity Program to get you financially aligned PLUS our powerhouse StarAuto, F&I training and private labels to keep your stars burning bright. With 27 years of administering nearly $600 million in paid claims to over 1.5 million customers, Interstate National Dealer Services remains the industry leader in strength, stability and your partner for a bright and profitable future. Team up with Interstate and get your stars aligned now! Collateral damage Although poor credit scores alone didn’t block people from deals before the current financial crisis, they now determine buyers’ fates. “If the credit score is under a certain number, lenders are asking for a lot more money than before,” Ponko says. “Now they want some collateral.” Consumers with average scores of 600 to 650 generally have to put Going up Rising negative equity in trade-ins has contributed to higher down payments. OCT. ’08 OCT. ’07 % CHANGE WE WARRANTY THE BIG THINGS IN LIFE Avg. down payment Avg. negative equity $3,024 $4,506 $2,465 $4,214 +22.7 +6.9 CALL 866-515-INDS OR VISIT INDS.COM Source: Edmunds.com http://www.Edmunds.com http://www.Bankrate.com http://www.INDS.COM http://www.INDS.COM http://www.INDS.COM http://www.Edmunds.com http://www.guidepointsystems.com http://www.guidepointsystems.com
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