Lending Low

Help from the company store

Americans buying new houses are exploring a whole range of so-called creative financing schemes to ease the pain of 17% mortgage rates. These include asking the owner to accept part of the home loan and elaborate borrowing plans that trade initial low monthly payments for steeply higher ones later. Consumers are also changing the way they finance their new cars. More and more people are borrowing money for a car from the auto company that built it rather than from the bank around the corner.

A decade ago, 62% of car loans were made at banks, while the financial subsidiaries of the auto companies (General Motors Acceptance Corp., Chrysler Financial Corp. and Ford Motor Credit Co.) had only 24% of the business. By early this year, according to the National Automobile Dealers Association, the banks' share had fallen to just 35.9%, while the car companies had garnered 42% of the market. The GMAC loan volume has increased from $12.8 billion in 1978 to an annual rate of about $20 billion this year.

During August, General Motors is trying to lure buyers into the showrooms with new-car loans at the bargain-basement rate of 13.8%. That would cut the total cost of an average $7,600, 45-month car loan by about $550 and reduce monthly payments by $12. The prevailing bank rate for an auto loan is now about 16%. The bank's figure traditionally has averaged a percentage point or so below that of the auto company.

How is it possible for GMAC to lend money at 13.8% when the prime rate is 20.5%? The answer is that GMAC borrows the funds it puts out as loans in the long-term bond market, where interest rates are lower. The company still has $300 million worth of old borrowing on its books at 4 3/8%, and even the interest charges on new GMAC bonds are still much less than the prime. So far in 1981, GMAC has issued bonds worth $1.75 billion at an average rate of 14.1%. Given the overall size and maturity of its bond portfolio, GMAC is roughly breaking even when it lends customers money at 13.8%.

Many banks are cutting back on car loans because they are being squeezed between the high cost of acquiring new money and state usury laws that limit the amount of interest they can charge. Banks in 20 states have all but given up on auto loans. Some moneymen are bitter about the loss of the car loan business. Says Roland Sittermann, vice president of the Southeast First National Bank of Miami: "Rates like GMAC's 13.8% are ridiculous. Banks are not about to compete with something like that when we have nothing to gain."

Chrysler was the first automaker to link interest rates to sales. Early last December Chairman Lee lacocca complained that the then 18.5% prime rate was "ridiculously high," and he cut car prices by 6%. This summer, however, both Chrysler and Ford have used the traditional sales stimulants of cash rebates and dealer incentives instead of interest-rate promotions like GMAC.

Some GM dealers say that the interest-rate publicity is helping sales in a normally slow period. Dick Shirley, general manager of Don Mealey Chevrolet in Orlando, Fla., reports that the program boosted his sales by 67% during the first half of August over the same period in July. Other dealers are angry because they are partially paying for the loan scheme; GM has cut the commission it pays to dealers for steering customers to GMAC. Yet after two years of a dismally poor car market, salesmen are happy to back any plan that helps to move autos out of their showrooms.

This file is automatically generated by a robot program, so viewer discretion is required.