Friday, July 27, 2007

The SubPrime Crisis and Car Sales

You have read a lot about the subprime crisis, especially if you invest in the stock market. All the talk so far has been about its effect on the housing market, which continues to decline, more so in South Florida than just about any other place in the USA.

Subprime loans are those made to those with poorer or lesser credit. When lenders get overly aggressive and careless in making these kinds of loans, it causes huge losses by the lenders, institutions that buy packages of these kinds of loans, and investors.

I can already see this affecting the retail automobile business. With the exception of a few imports like Honda, Toyota, and Hyundai, most car sales are way off. This is partly do to the plunge in the home building market, but it is also due to lenders tightening their credit reins which affect the subprime market first and most.

Those manufacturers of cars and dealers selling those makes whose sales are way off sometime resort to desperate measures to prop up their sales. The subprime customer is an “easy sale”. In fact, the subprime customer requires very little selling at all, just the ability to find someone to make him a car loan. The dealer can “sell” that kind of a customer any car at any price. The customer is just grateful that the dealer was able to get him financed. Dealers have a nickname for these kinds of customers…”Get-Me-Dones”.

There are a number of things that those with marginal or bad credit should be very careful of when buying a car. Oftentimes dealers will falsify credit applications in order to get the loans approved. The customer signs the credit application, testifying to the truth of all of the information. You are breaking a federal law if you obtain a loan by lying to the bank about your credit. More often than not, the car salesman or finance manager actually fills out the credit application and the customer just signs it. You should read your credit application very carefully and be sure that all of the information is accurate.

Another thing you should verify before signing a finance contract with a lender is that the options and accessories on the car you are buying have been accurately represented to the lender. Dealers will often represent to the lender non-existent accessories like leather, sunroofs, CD players, and even misrepresent the model of the car to make the bank think their collateral is worth more. This allows the dealer to obtain a larger loan than the bank should be making and also allows the dealer to make a larger profit.

You will notice more ads today aimed at those with credit problems. Dealers will advertise, “No credit-no problem” or “No credit application refused”. Another favorite is “We’re looking for good people with bad credit”. These ads are to target the desperate buyers who are easy to sell cars to and are likely to be very careless about verifying that their credit application is accurate. In fact, some buyers are desperate enough that they will join in the deception of the lenders.

The subprime crisis, which has been underway in the housing market for almost one year, is just getting started in the retail car market. There are a lot of bad subprime loans being carried by subprime lenders. They are already tightening up in their credit requirements and they are being much more careful about verifying the accuracy of credit applications and the accessories that are represented to be on the cars they finance. Lenders are calling the customers directly to ask them if they have leather or a sunroof on the car they just bought. More subprime lenders will be either going out of business or switching to conventional lending only.

All of this will hurt the sales of those makes and those dealers that have relied heavily on subprime customers. I wouldn’t advise you to buy stock in Ford, GM, Chrysler, or any other struggling auto manufacturer at this time. In my opinion, their sales will be dropping a lot more due to the subprime crisis.

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