Financial Planning: A Midyear Guide 1987 : part four: Borrowing : Auto Loans: Loaded With New Options

Last March Joseph Willock II opened his mailbox to find a tempting offer from the Lockheed Federal Credit Union. If we can’t lower your monthly car payment, a flyer boasted, we’ll give you $50.

The 33-year-old USC office assistant jumped at the offer. After all, he was stuck with a clunker of a loan on his 1985 Subaru: $264 a month for 60 months at 15.5% interest. He went to the credit union and found he could trade the loan in for a 48-month, variable-

rate contract starting at 9.5%. His monthly payment dropped $54.

Willock, a former Lockheed employee and member of its credit union, wasn’t the only one to go for the offer. During the month, the credit union wrote more than $2.2 million worth of vehicle loans. Of the people who responded to the mailer, only two pocketed $50.

The offer was an attempt by the credit union to “steal back” business from the major auto financing companies, according to its marketing director, Joe

Schroeder. “The day of credit companies sitting back and waiting for their members coming to them out of loyalty is over,” he said. “There are some credit unions who still believe that, and I think they are living in Disneyland.”

The credit union’s offer is just one example of the stiff competition for auto loan customers, a contest that has led to a sometimes confusing array of financing choices for consumers. Throw in manufacturer or dealer incentives such as cash-back rebates, and it becomes all the more difficult to decide which deal will be easiest on the wallet.

And then there’s the Tax Reform Act of 1986, which has made it more expensive to finance a car for those who itemize deductions on their tax returns.

One thing is certain: Now is a good time to shop for a new car, experts say. Car production levels are continuing to outpace demand at the same time new import brands are being unveiled in this country. Sagging auto sales during the early months of this year are also expected to benefit the buyer.

“You can go in and bargain,” said Jeanette Garretty, a vice president and senior economist with Bank of America in San Francisco. “There is a lot more available in model ranges and a much better range in terms of price.”

The competition among manufacturers means that buyers will continue to see discount financing being offered by auto makers and their dealers. Spokesmen for both General Motors Acceptance Corp., the financing arm of General Motors, and Ford Motor Credit Co., both predict that buyer incentives are here to stay for the foreseeable future.

Of course, deciding which financing package to take and which to pass up depends largely on what one can afford and the interest rates available. However, some experts--dealer statements to the contrary--say consumers who opt for below-market interest rate packages sometimes wind up paying more for the vehicle or steered to models that th1702436975purchasing.

Better to bargain hard, take the cash rebate if it is offered as an alternative, apply it to the down payment and then shop for favorable financing, they say.

Moreover, the low interest rates offered under some financing programs require the buyer to

make a larger down payment and finance the car for a shorter period. That means a larger initial outlay of cash, which presumably could be invested elsewhere. It can also mean a larger monthly payment.

Whatever financing package a buyer chooses, tax law changes have upped the costs for those people who itemize deductions. The sales tax deduction has been eliminated, and only 65% of the interest costs of an auto loan are deductible on 1987 federal income taxes. The amount drops to 40% in 1988, 20% in 1989 and 10% in 1990. In 1991, the deduction disappears.

Consider a couple with a gross income of $50,000 a year. One spouse works, they have two children, a $60,000 mortgage at 12% interest and other deductions that put them in the 28% tax bracket. If the couple buys a $16,000 car with a 20% down payment and finances the balance at 12% for three years, they could have saved $1,038 on their taxes under the old law.

Auto financing experts and dealers say that because the interest deductions have not yet been fully eliminated, it is difficult to gauge what the ultimate effect will be on buying habits.

“Everything hasn’t sunk in yet in people’s minds,” said Tom Edwards, general sales manager of South Bay Volvo in Torrance. “This is a transitionary period we are in. People are checking with their tax man.”

Nevertheless, Edwards and others say that buyers are talking more and more about using home equity loans for future car purchases. That’s because a provision in the new tax law permits interest on a loan backed by a home to be deducted for those who itemize. For example, if a homeowner has $25,000 of real equity in the house and has put in another $25,000 of improvements, he or she can tap a $50,000 line of credit and write off the interest. (See “New Home Equity Loans,” Page 29.)

Consumer groups have warned that homeowners should be careful before they take out such a loan or they could risk losing their home. William E. Odom, Ford Motor Credit Co. president, said the company generally opposes the use of home equity loans for purchasing autos because it takes too long for a consumer to have any equity in the car.

Nevertheless, Odom said Ford is thinking about offering such a loan. GMAC spokesman Charles Newcomer said GMAC will introduce a home equity loan program to car buyers sometime this year.

One bank in Providence, R.I., has already devised a program that allows consumers to use home equity loans to purchase vehicles at one of about 20 Rhode Island auto dealers that the bank deals with regularly.

Raymond G. Leveille Jr., vice president in charge of consumer credit for Old Stone Bank, said the “Equi-Auto Loan” program works this way: A buyer goes to a dealer and selects a vehicle. The customer fills out an application for an auto loan with the dealer and, at the same time, the dealer obtains information about the buyer’s home--its market value, whether there are liens against it, and so on. If the buyer qualifies, the auto loan is then converted by the bank to a home equity loan within 30 days.

The cost of leasing a car has been increased in the wake of the tax changes, largely because leasing firms lose investment tax credits and a portion of their depreciation write-offs. And for consumers the decision to buy or lease is still complex, depending on such factors as cash available for a down payment, how long they plan to keep the car and whether business deductions are allowable.

In short, consumers should study all alternatives to determine how they fit into one’s own financial situation before making a decision. “You want to go in with your eyes open,” Bank of America’s Garretty said. “One of the difficulties of having so many choices is that you have to be very careful you understand those choices.”