GMAC Loosens Credit to Make Vehicles Easier to Buy

By: Bree Fowler AP
By: Bree Fowler AP

NEW YORK (AP) - Easier auto loans for more people.

The struggling financing arm of General Motors Corp., rescued by $5 billion in federal aid on Monday, plans to use some of the money to make cars and trucks more affordable to a larger pool of customers.

It's the first time that a financial institution has said it will use money from the $700 billion bank bailout to offer more affordable credit to consumers.

On Tuesday, Detroit-based GM said it will offer zero percent or low-interest financing on some slower-selling 2008 and 2009 models as part of a year-end sales push - a move made possible by the newly available cash at the financing arm.

The GMAC funding, on the heels of the $17.4 billion automaker bailout approved by the Bush administration earlier this month, gives some relief to auto dealers who had blamed the industry's steep drop in sales partially on a lack of affordable credit.

Michael Martin, who owns Chevrolet and Saturn brand dealerships in Manassas, Va., said he thinks the loans will be key to turning around the auto industry, adding that GMAC's loosening of credit sets an example for banks that have yet to use their bailout funding to free up consumer loans.

"I think these things really spur consumer confidence too," said Martin, who had already seen customer traffic pickup at his dealerships on Tuesday. "People are saying it's good to see GMAC back in the marketplace. Whether it's just a euphoric feeling or not at least it's a positive."

Vehicles sales have declined sharply this year, plunging 37 percent in November to their worst level in more than 26 years, with every major automaker reporting a drop of more than 30 percent. GM was among those worst hit, reporting a 41 percent slide for the month.

GMAC said Tuesday that as a result of the government aid it will resume offering automotive financing to customers with credit scores as low as 621, eliminating restrictions put in place two months ago as a result of the tight credit markets that mandated a minimum score of 700, an exceptionally good score.

Marc Cannon, a spokesman for AutoNation Inc., a Fort Lauderdale, Fla.-based auto retailer that encompasses 264 dealerships including 73 GM franchises, noted that consumers can faithfully pay their bills for years, but if they miss one or two payments along the way, their credit score can drop into the 600s.

"They're not lowering standards, they're bringing more people into the game," Cannon said of GMAC. "These people are still customers and they're still good people you want to help get into the right vehicle."

Other dealers weren't as optimistic.

Joe Piane, general sales manager at Ostrom Chevrolet in the Los Angeles suburb of Montebello, said his dealership's sales had been
"devastated" since mid-October, when GMAC's lack of money prompted it to tighten credit.

And even if the credit crunch eases, Piane believes consumers will be less likely to spend money they don't have.

"I'm a believer that we never had a big economic boom. We just had a lending quagmire," he said. "I don't think business is ever going to be back to usual."

Mark LaNeve, GM's vice president for GM North America vehicle sales, service and marketing, said GMAC's $5 billion in loans was crucial for the company to afford the zero-percent and low-interest financing on some vehicles.

GM said Tuesday that it will offer zero-percent financing for up to 60 months on the 2008 Chevrolet TrailBlazer, GMC Envoy and Saab 9-7X sport utility vehicles. The Saab 9-3 and 9-5 sedans also qualify for zero-percent financing.

The automaker is also offering financing between 0.9 percent and 5.9 percent on more than three dozen other 2008 and 2009 models, including many trucks and SUVs. The deal runs through Jan. 5.

In addition to the $5 billion for GMAC, the Treasury also will lend up to $1 billion to GM so that the company can purchase additional equity that GMAC is planning to offer as part of its effort to raise more capital.

In exchange for the funding, the government will receive preferred shares that pay an 8 percent dividend and warrants to purchase additional shares in return for the money, the department said.

The Treasury did not require that GMAC engage in more lending as a condition for receiving the government investment, spokeswoman Brookly McLaughlin said.

The $6 billion in total assistance means that Treasury has now committed more than the first $350 billion from the $700 billion bank rescue program. Under the law governing the program, the administration must ask Congress for the second half of the funds
and Congress can vote to block their release.

A Treasury official said the financing for GMAC comes from the first $350 billion, since not all of the allocated funds have been spent yet. For example, only about $162 billion from the $250 billion that was set aside in October for investment into the banks has been spent.

But the official added, "it's clear that Congress will need to release the remainder of the TARP."

The $5 billion investment in GMAC has already been completed. Treasury is seeking to finalize the $1 billion loan by Jan. 16.

This isn't the first time that the Bush administration has committed more than the first half of the bailout money. About $4 billion of the $17.4 billion in loans the administration promised Dec. 19 for GM and Chrysler LLC would have to be paid out of the second $350 billion.

But it is far from guaranteed that Congress will release the extra money. Lawmakers from both parties have criticized the Treasury Department for lax oversight of the funds it provided to banks and for not using some of the money to prevent home foreclosures.

(Copyright 2008 by The Associated Press. All Rights Reserved.)


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