Easy Credit by Auto Makers Cited as Loan Defaults Rise

Easy consumer credit, which helped car dealers move more than 7 million vehicles out of their showrooms last year, has led to a sharp increase in defaults on loans for new cars.

Ford Motor Co. and General Motors disclosed figures this week indicating that more consumers are having trouble repaying their car loans in the wake of aggressive new car buyer financing programs that offered loans of five years or longer and required little or no credit history or down payment.

California may be especially prone to defaults because it is the nation’s largest car market and because high car insurance rates here make it difficult for residents to afford personal transportation, experts say.

Defaults seem to be hitting mostly the domestic auto makers, which all have subsidiaries that provide new car loans. But Chrysler says it has fewer problems with defaults on car loans because it has not relaxed its standards to make more sales. Commercial banks and credit unions also say they have not been hit as hard by the default problem.

Ford, which announced record profits Thursday, said earnings from its financial service company, Ford Motor Credit Co., last year fell $115 million to $564 million because of higher credit losses.

GM, meanwhile, says it repossessed more than 143,000 cars and trucks last year, a 23% increase from a year earlier. The car maker also set aside more than $1 billion in 1988 to cover automotive loan losses, about double its loan-loss reserve of 1984.

Today, more than two-thirds of GM and Ford car loans are for five years or more, while less than half the car loans originated by commercial banks are longer than 48 months.

“Credit losses are throughout the industry, and I think it’s mostly due to the five- and six-year loans,” said William E. Odom, chairman of Ford Motor Credit Co. “On a five-year loan it takes 37 months before the customer owes less than what the car is worth. It’s 25 months on a four-year loan.”

GM and Ford say defaults make up only about 2% of all new cars sold.

“Loan losses have to be put in perspective,” said Ronald Glantz, an auto analyst for Montgomery Securities investment house in San Francisco. “It’s traditional for these finance company subsidiaries (of Ford and GM) to be the lender of last resort.” And in some cases, Glantz said, they are making loans to marginal buyers.

Bank Pulling Out

The heated competition to relax loan standards has given some lenders pause, however.

In November, First Interstate Bank announced that it would phase out its practice of offering car loans through auto dealers because competition from finance companies associated with big auto makers made the business unprofitable.

“I think we have a whole different credit criteria than the captive finance companies,” said Derrald K. Johnson, a vice president at Bank of America, the leading commercial bank lender for new car loans. “Their motive is to sell the car; our motive is to make a good loan.”

The longer installments aren’t necessarily bargains for consumers, he said. Although monthly payments on a $20,000 five-year car loan at 11.5% simple interest would be $219.60 less than a three-year loan, Johnson said the borrower would end up paying $2,651.04 more.

Yet many borrowers seem to prefer lower monthly payments and longer terms.

Lockheed Federal Credit Union in Burbank reports strong demand for car loans it offers for terms of up to six years and few problems with defaults.

Tammy Tagami-Reeves, marketing manager, said that despite the longer repayment periods, default rates are low in part because some 38% of the 71,000 credit union members choose to repay their loans through payroll deductions.

“We loan money not based on collateral but on members’ ability to pay us back,” she said.