Detroit Needs to Give Credit Where It's Due

Here's a good way to rescue Detroit: Make it easier and cheaper for the millions of Americans with poor credit ratings to buy new cars

Because I couldn't graciously accept a solid piece of advice—and in fact, with youthful hubris, dismissed it as foolish—I accepted the position of finance manager at a local Buick dealership in the winter of 1976. My soon-to-be former employer tried to talk me out of it: "Buick owners have great credit, they won't finance with the dealership," he warned. "Think of your career!"

In fact, Buick owners did have exceptional credit in those days, although not appreciably better than did the buyers of Oldsmobiles in the North Dallas suburbs, where I had previously worked. And though the country was emerging from a serious recession in 1974-75, a direct result of the first energy crisis, the vast majority of credit applications submitted to GMAC and our affiliate banks came back approved. On rare occasions, a note would receive final approval only if the buyer put more money down, to lower the lender's risk.

In the better suburbs it was unusual when someone's credit bureau showed a truly poor payment history—or rarer still, a past bankruptcy. But even those customers understood that rebuilding their credit standing would entail a sizable downpayment to lessen the lender's loss should the new vehicle be repossessed. In the end, I would estimate, by far most buyers attempting to purchase an automobile on credit were capable of completing the purchase.


The industry got a boost then, because the Baby Boomers graduated and bought their very own first cars. (GM's midsized coupes, from the Cutlass Supreme to the Chevrolet Monte Carlo or even the Buick Regal, seemed to be their vehicles of choice.) But other factors helped many a car buyer trade frequently in that decade.

Until 1974 the average new car buyer took a note of less than 36 months. After 1974, the term length was increased to 42 months because the economy had gone south and it was thought that a longer note would entice more buyers. By the end of the 1980s, 60-month financing was starting to take hold. The short-term nature of automobile loan financing common before 1974 had given most individuals strong equity in their trade-ins, which allowed them to trade more often. That situation would not exist after 1980.

It should also be noted that, by scrimping a little and saving a lot, even people working in minimum-wage jobs often bought new cars. Just last week, General Motors (GM) Chairman and Chief Executive Rick Wagoner talked about his own first car, a 1973 Camaro for which he paid $3,500—money he had saved from mowing yards at $2 a pop.

A quick calculation shows how much things have changed: In 1969 a teenager working a full-time job, earning $1.30 an hour, earned enough in one year to purchase a new Ford Mustang—albeit one without many optional features. Even as late as 1976, that same minimum-wage job (now paying $2.30 an hour) would let you purchase a new Olds Omega with change left over. While it's too soon to tell how GM is going to price its retro Camaro, rest assured that it will cost far more than the $10,712 today's minimum-wage worker earns per year.

Therein lies the real reason for the Korean imports' success in this market: Those living on the wrong side of America's financial tracks often find their automotive first choice priced far beyond their means. Likewise, this financial obstacle will probably mean that the first Chinese cars to be offered here will enjoy similar success.


All that said, losing so many first-time buyers from its showrooms over the past 30 years is the least of Detroit's problems. This most recent wave of stagnant wages for the employed middle class—and the graying of America—have further diminished the buyer pool that GM, Ford (F), and DaimlerChrysler's (DCX) Chrysler division once counted on for their market dominance.

It's not a question of Detroit making cars no one wants, it's that Detroit is making cars its traditional customer base can't afford. Too often these buyers don't have the money or the credit rating to buy a new car—American or otherwise—sales incentives and employee discounting notwithstanding.

To prove that, let's look at the problems of the Mercury Marquis over the past eight years. Certainly, Grand Marquis buyers are among the oldest demographic in the industry, but Lincoln Mercury dealers used to take great pride in how many of their loyal owners traded in for another one every two to four years. That habit has been gradually broken over the past four years, and the causes are obvious.

Yes, the buyers have aged even more, but many seniors now live on a fixed income that buys less every day. The cost of food has risen substantially in this period. A 250% rise in the price of gasoline would wreck any fixed budget. And in states such as Texas, the deregulation of electricity providers has effectively doubled the cost of home energy.

The combination of these costs would most assuredly make a person living on a fixed income upgrade his or her transportation less often than they had in the past. Similarly, over the past four years the solidly middle-class family raising two children has watched its income lag far behind the Consumer Price Index. The real cost of just energy and gasoline has overnight subtracted $3,000 to $3,400 from the income many families once called "disposable."

For the millions of middle-class families living paycheck to paycheck, that eliminates the possibility of a new car in the driveway. For example, though Dallas/Fort Worth has recovered well from the downturn after 2001, new car sales are still down 70,000 units from that peak year for sales. It's no secret that most of those sales were lost from what used to be high-volume domestic dealerships.

It should also be noted that manufacturing jobs in America have declined by the millions over the past six years. At the factories that paid the best, the parking lots were once commonly filled with shiny late-model steel from Detroit.


One other factor seems to be hurting Detroit: the increasing number of two-income families with a marginal or poor credit rating. The fact that some people have poor credit is nothing new. What is new is the size of that market and those individuals' inability to secure financing on their own.

As recently as 1990, individuals with bad credit often purchased new cars. Typically they used their credit union at work to secure financing—assuming they had long tenure on the job and had previously borrowed money and paid it back promptly. However, prior to 1988, there didn't seem to be a substantial mass of such buyers attempting to purchase a new car.

Today things are different. One loan approval supervisor for a large automotive finance company informed me that in some weeks, half of all of the submitted applications are denied on the first pass. (Not all for bad credit—for some, the amount being submitted to finance fell outside of approval regulations.)

The number of individuals with poor credit attempting to purchase cars kept increasing until, by the mid-'90s, local dealerships started offering sub-prime financing. In its infancy, the problems involved in processing those loans often outweighed the dealer's success with the programs. However, by the late '90s, more and more dealers were working their way through the often-difficult procedure for approval and funding of these applications and were starting to show remarkable success in acquiring financing for these buyers.

The only question that remained, though it wasn't asked, was what had happened to our middle class in two decades to make specialization in the sub-prime loan market necessary in order for new car dealers to be profitable? This situation was unheard of in the two decades in which the Baby Boomers entered the workforce.

After a recent study of the growth of the sub-prime buyer in the North Texas area, combined with the nationwide work done by Art Spinella at CNW Marketing Research, I wrote in an economic report for a national radio group that Detroit's salvation would come not if they continued to offer Zero Percent Financing for 60 Months, but if they increased the size and capability of their internal finance arms' collection departments—and offered the sub-prime buyer 9.9% interest for 60 months on their new products.

I contended that Detroit had hundreds of thousands, if not millions, of potential and loyal buyers for their new products who were being forced to buy used cars instead. They couldn't afford a new car and 17% interest, but, if they struggled, they could make the payment on a used car with that same interest rate.

Then GM proved my point without drawing undue attention to it. Shortly after I finished that paper, GM launched a Zero for 72 Months sales campaign—and limited the time for this offer to less than three weeks. While Ford and Chrysler were struggling to succeed in spite of their dynamic consumer offers during that same period, GM racked up sales almost effortlessly.

The secret of GM's success lay in the fact that it quietly told dealers that anyone with an A to E credit score would be approved. GMAC was knowingly approving individuals that previously would have been purchasing used cars at 14% to 17% interest. This time around, GM gave them interest-free loans with no questions asked. Finance managers at GM stores were simply resubmitting previously declined customers and putting them into new cars.

When one Chevrolet dealer informed me of just how this sales campaign had managed to be so successful in such a short period, I said, "Congratulations, now you are Mitsubishi."


From stagnant wages to uncontrollable energy costs, pressures on many in the middle class make it difficult, if not impossible, for them to purchase a new car—and these were often Detroit's main buyers. As those who have retired over the last decade have seen their fixed incomes diverted into these same costs, their trade cycles have extended accordingly.

The saddest situation has been the rising number of working families whose credit ratings have fallen. They too are incapable of buying new. However, as we have seen, the rise of the upper class's incomes can be tracked by the success of the country's luxury-car importers. At the other end of the scale, members of the lower middle class have found Korean and used cars more to their liking—or at least more in line with their incomes.

Rick Wagoner, be glad you came of age in a time when one could mow yards and buy a brand-new Camaro. It's a sure bet that when the next Camaro comes to market, no teenager with a pocket full of grass-cutting dollars will have enough for even the downpayment. And to those who write that Detroit's problems are the cars they build, you're wrong. Millions would love to buy from Detroit today: Their spirit is willing, but their wherewithal is mortally weak.

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