The squeeze on getting a car loan

Car dealers say they can still get financing for customers, but experts warn it's a tough market.

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By Peter Valdes-Dapena, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- A massive pile-up in the credit markets is causing serious congestion for new car buyers who want financing, according to industry observers. But some dealers say they're still able to work out deals.

"Credit availability has been the number one issue in our industry for several months now," said Mike Jackson, chief executive of AutoNation (AN, Fortune 500), the country's largest auto dealership chain.

The inability to arrange suitable financing has killed the deal for a lot of customers in AutoNation's 317 dealerships nationwide, Jackson said. He stressed that customers are still coming in, but they can't get a loan they can afford on the vehicle they want.

Almost all auto dealers recently surveyed by the industry newspaper Automotive News said they were having a harder time finding loans for customers with poor credit. About 60 percent said they having more trouble getting financing even for customers with good credit.

During the housing boom, home equity loans were often used to finance car purchases. But the housing market collapse has put more pressure on auto financing, Jackson said.

"The issue with autos right now is that, essentially, we're having our own credit crisis that's brought on by the credit crisis," said George Magliano, director of North American auto industry research for the consulting firm Global Insight.

Still wheeling and dealing

At the same time, a general downturn in auto sales seems to be pulling against a tendency to raise interest rates for customers too much, said Richard Howse, senior director for automotive financing for industry consultants J.D. Power and Assoc.

"Rates are actually down from the first half of 2007 to the second half of 2008," Howse said. But they have recently started to creep up, he noted.

Several auto dealers interviewed by CNNMoney.com said business is tough overall, but they can still get loans for customers who want them.

"With the volume of business down, they're trying to put every deal together," Tommy Brasher, owner of Brasher Motors in Weimar, Texas, said of his relationship with auto finance company GMAC.

GMAC, which provides financing to General Motors (GM, Fortune 500) dealerships and their customers, would not say how events in the financial markets have affected its business.

Keith Roberts, who owns Hoover Dodge in Charleston, S.C., said he wasn't having any problems either, beyond the fact that customers simply aren't as plentiful as they once were.

"What's affected us more is the media and the media's perception of what's going on," he said. Finding financing deals for customers isn't a problem, according to Roberts. It's getting them to buy a car - period. "People just aren't spending money as they have in the past," he said.

The baggage they carry

But the biggest financing problem financing dealers face right now is one brought on by auto dealers and auto financing companies themselves, said Tawny Arnaud, vice president of sales for Galpin Motors, a chain of nine dealerships in the Los Angeles area.

Many customers who want to trade in vehicles today are still paying off extra-long loans they arranged on their last car purchase, he said. Loans of long as or six years have become commonplace in the industry.

When customers try to buy another new car after three years they often have a vehicle that's worth less than what they still owe on it. That makes financing the new vehicle difficult, or at least expensive, since the amount owed on the old car has to be wrapped into the new car payments.

That's what's making it harder to get affordable car loans for customers -- not the credit crunch - Armaud said. "People really should be thinking in terms of short-term financing."

Where it goes from here

There's simply no way to predict what the most recent developments in the banking sector will mean for the auto industry in the long term, experts said.

"There's no input in the econometric models to capture some of the outcomes we've seen over the last two weeks," said Ford Motor Co.'s (F, Fortune 500) top sales analyst, George Pipas.

"I think this is all new territory for everyone in terms of how long it will take to work through this credit crunch," agreed Deborah Meyer, Chrysler LLC's chief marketing officer.

One thing that experts agree is clear is that overall auto sales won't get better soon, and they probably won't start to come back before the end of 2010, they said.

"If we were in the 6th or 7th inning of the credit crisis, I'd say we're going into extra innings," AutoNation's Jackson said.

For now, Tom Libby, an analyst with J.D. Power and Assoc., said he is still forecasting a very slight upturn in auto sales for next year. The company forecasts 14.2 million sales for this year, he said, and 14.3 million for next year.

"But we're keeping the right to monitor that," he said. To top of page

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