An Example of Auto Makers Getting Desparate?
Auto sales have been falling. At least a year ago, you could spot the problem unfolding. We say "at least" because you really could have predicted what's going on two to three years ago. By then we were well into the "subprime" auto loan trend. And you didn't need to do a lot of research to notice this trend. All you needed to do was listen to the music streaming service Pandora. At least that's how it came to my attention.
It all started around three years ago as I was talking a stroll through a large city park, listening to my Pandora music. Since I was streaming the free service, every once in a while commercials interrupted the music. For at least a year, if not two, three quarters of the commercials were exactly the same: a female voice enthusiastically invited those who had bad credit scores to come in to "Dealer X" to lease not just a car, but specifically and emphatically, a luxury car. She even specified BMW, Audi, and Mercedes, to be clear. The first few times I heard the commercial, it kind of floated by me, since I tend to zone out or even mute when those commercials come on. Eventually though, I did notice what was being said.
While I wasn't shocked at the offer presented, it was a bit surprising. Were these people serious, or was this a "bait and switch" operation meant to get people into the dealership, only to find that they somehow don't qualify for the luxury vehicles, but they could get a deal on, let's say, a Toyota, Ford, or Honda? If real, you'd start seeing luxury vehicles parked on the streets. And, as we've reported previously, that's what happened. Neighborhoods where the presence of a luxury car once served as a flag for a drug dealer began to be peppered with - you guessed it - beautiful new BMWs, Audis and MBs.
So the sub-prime auto loans mushroomed. Naturally, comparisons with the housing sub-prime debacle eventually found their way into the financial media. And, inevitably, as growing percentages of sub-prime drivers failed to make payments, financing companies' appetite for these shabby loans and leases declined. Those previously leased cars are still around; but you might guess what will happen when the leases and loans terminate: dealers won't re-up. The cars may even appear on the market at bargain prices. At least that's where logic might take you.
One thing we know for sure is that auto sales drop as this cheap financing disappears.
Which brings us to this announcement by Ford:
While on the surface, this might appear to make sense, given the slow down in sales, it doesn't really seem to add up. Indeed, you have to wonder whether this might be some sort of scheme cooked up by a company desperate to prop up sales. In any case, two things might strike you while reading the article:
First, traditional lending always considered multiple factors before the ubiquitous "credit score" took center stage in decision-making. Given the reliance for years on credit scores, are there enough experienced loan officers out there to will step in assess a credit risk based on more nuanced factors? Likely they'll try to come up with some algorithm that can be programmed into the computer software of the finance departments of the dealerships. Salespeople can gather whatever data is necessary to determine whether the prospect fits the profile of an acceptable risk. Of course, this depends on both the data being presented truthfully by the prospect and being accurately gathered by the salesperson. We here recall those "liar loans" that ultimately pushed the sub-prime housing market over the edge in 2007, and wonder whether the pressure to generate sales will now spawn a species of liar auto loans.
Second, there's absolutely no mention of Ford lowering prices in order to entice buyers. That's likely due to the fact that no one actually buys cars these days. In the parlance of the dealers, they can "get you into" the car of your dreams for "$X" a month - with "$Y" down. No one will even bring up a price for the vehicle unless you press for it. And few do press. They simply focus on the monthly nut. So, really, it's simply all about monthly payments.
And that brings us back to whether the prospective buyers, now to be screened with these "additional factors" will be able to sustain their payments over the period of the lease or loan. We'll have to wait and see whether the geniuses at Ford can come up with new criteria that will somehow assure on time payment.
If it all works out, then there's no real reason for the auto makers to lower prices in the face of dried up demand. And doesn't that sort of twist economic logic? In the past, that logic would have been something like: If fewer people can afford our product, we'll have to either curtail production, reduce our price, or both.
But if Ford (with others to likely follow) succeeds in this latest scheme to keep the focus on the monthly payment, rather than the price, we who have been buying our cars for cash may have to reconsider the wisdom of doing so in the future. After all, if prices don't really respond to demand, then you can raise prices strictly based on that number being used in a formula used to devise monthly payments - a case of the tail wagging the dog. While I haven't settled my thinking on this, the question nevertheless emerges: If Ford's experiment succeeds and another round of leasing/lending pushes up both sales and prices of cars, will we need to reassess whether buying for cash makes sense?
Frankly, my personal visceral response would likely be that I prefer keeping my distance from the debt slavery that banks have successfully conditioned many of us to accept. When you add up the payments on those mortgages, car loans and leases, credit card balances, and those newer "payment plans" being introduced, there's little left over from our paychecks. Is that any way to live?
It all started around three years ago as I was talking a stroll through a large city park, listening to my Pandora music. Since I was streaming the free service, every once in a while commercials interrupted the music. For at least a year, if not two, three quarters of the commercials were exactly the same: a female voice enthusiastically invited those who had bad credit scores to come in to "Dealer X" to lease not just a car, but specifically and emphatically, a luxury car. She even specified BMW, Audi, and Mercedes, to be clear. The first few times I heard the commercial, it kind of floated by me, since I tend to zone out or even mute when those commercials come on. Eventually though, I did notice what was being said.
While I wasn't shocked at the offer presented, it was a bit surprising. Were these people serious, or was this a "bait and switch" operation meant to get people into the dealership, only to find that they somehow don't qualify for the luxury vehicles, but they could get a deal on, let's say, a Toyota, Ford, or Honda? If real, you'd start seeing luxury vehicles parked on the streets. And, as we've reported previously, that's what happened. Neighborhoods where the presence of a luxury car once served as a flag for a drug dealer began to be peppered with - you guessed it - beautiful new BMWs, Audis and MBs.
So the sub-prime auto loans mushroomed. Naturally, comparisons with the housing sub-prime debacle eventually found their way into the financial media. And, inevitably, as growing percentages of sub-prime drivers failed to make payments, financing companies' appetite for these shabby loans and leases declined. Those previously leased cars are still around; but you might guess what will happen when the leases and loans terminate: dealers won't re-up. The cars may even appear on the market at bargain prices. At least that's where logic might take you.
One thing we know for sure is that auto sales drop as this cheap financing disappears.
Which brings us to this announcement by Ford:
A major auto lender has decided to change its approval process to look beyond credit scores in an effort to pump up sales....The article goes on to try to explain not only the motive, but the market and the criteria that Ford will target. Apparently they will no longer rely on credit scores, but will add other factors in their decision whether or not to loan money to a prospective buyer.
The company says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans.
While on the surface, this might appear to make sense, given the slow down in sales, it doesn't really seem to add up. Indeed, you have to wonder whether this might be some sort of scheme cooked up by a company desperate to prop up sales. In any case, two things might strike you while reading the article:
First, traditional lending always considered multiple factors before the ubiquitous "credit score" took center stage in decision-making. Given the reliance for years on credit scores, are there enough experienced loan officers out there to will step in assess a credit risk based on more nuanced factors? Likely they'll try to come up with some algorithm that can be programmed into the computer software of the finance departments of the dealerships. Salespeople can gather whatever data is necessary to determine whether the prospect fits the profile of an acceptable risk. Of course, this depends on both the data being presented truthfully by the prospect and being accurately gathered by the salesperson. We here recall those "liar loans" that ultimately pushed the sub-prime housing market over the edge in 2007, and wonder whether the pressure to generate sales will now spawn a species of liar auto loans.
Second, there's absolutely no mention of Ford lowering prices in order to entice buyers. That's likely due to the fact that no one actually buys cars these days. In the parlance of the dealers, they can "get you into" the car of your dreams for "$X" a month - with "$Y" down. No one will even bring up a price for the vehicle unless you press for it. And few do press. They simply focus on the monthly nut. So, really, it's simply all about monthly payments.
And that brings us back to whether the prospective buyers, now to be screened with these "additional factors" will be able to sustain their payments over the period of the lease or loan. We'll have to wait and see whether the geniuses at Ford can come up with new criteria that will somehow assure on time payment.
If it all works out, then there's no real reason for the auto makers to lower prices in the face of dried up demand. And doesn't that sort of twist economic logic? In the past, that logic would have been something like: If fewer people can afford our product, we'll have to either curtail production, reduce our price, or both.
But if Ford (with others to likely follow) succeeds in this latest scheme to keep the focus on the monthly payment, rather than the price, we who have been buying our cars for cash may have to reconsider the wisdom of doing so in the future. After all, if prices don't really respond to demand, then you can raise prices strictly based on that number being used in a formula used to devise monthly payments - a case of the tail wagging the dog. While I haven't settled my thinking on this, the question nevertheless emerges: If Ford's experiment succeeds and another round of leasing/lending pushes up both sales and prices of cars, will we need to reassess whether buying for cash makes sense?
Frankly, my personal visceral response would likely be that I prefer keeping my distance from the debt slavery that banks have successfully conditioned many of us to accept. When you add up the payments on those mortgages, car loans and leases, credit card balances, and those newer "payment plans" being introduced, there's little left over from our paychecks. Is that any way to live?
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