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GM: Take Our Car Loans, Please

Adam Rust's picture

Posted June 24, 2010

An issue is emerging in the Motor City: can General Motors wean itself off of subprime financing? The classic GM customer was a credit guzzler. How many GMs were purchased in the last decade on the heels of a cash-out refinance? That won't work any more. GM's credit rating has fallen way below investment grade, and there's little thirst for a chance to drink from a firehouse of sub-prime asset-backed securities.

Someone else has got to be the one saying "approve, approve, approve."

Woodrow Wilson once said "what's good for GM is good for the country, and vice versa." Maybe the unsaid rejoinder

to that slogan was that what's bad for the country is also bad for GM. GM's buyers are disproportionately more likely to have lower credit scores than are those seeking to buy Hondas and Toyotas. Overall, about one in six new car purchased is made to a consumer with sub-prime credit.  Only one in five Honda buyers needs to tap a loan that would be considered "sub-prime." For GM, it is a different story. Forty-four percent of GM buyers are below-prime.  That includes both buyers and those who lease, and even though that excludes the healthy portion of selling that GM does to fleet buyers, it still represents a large share of their business.

GM is trying to shift some of the risk off its balance sheet. It spun off GMAC into Ally Bank. Still, sales are still dependent on available credit. That's even more evident when you consider that the leading feature of a GM car, since September 11th, 2001, has been the zero percent financing offered on new models. The second best feature - perhaps that the cost of owning a GM car is delayed. You spend a lot of money pouring gas into a GM car, and less buying it in the first place. Of course, the consumer has figured out that this is ultimately a losing proposition.

Loans are really important to the GM plan. Some would argue that GM is a finance company that provides cars as a promotional come-on and uses those proceeds to pay pension liabilities. Indeed, neither Rick Wagoner or Fritz Henderson had any experience with building cars when they were named CEO. Both came from the finance division. As recently as 2004, GM was shedding workers in its car building division but adding them in its finance subsidiaries.

GM made a lot of money on auto financing when times were good.  According to one analyst, GM lost $6 billion on vehicles in 2005, but earned $2.2 billion on financing.

Now GM wants to find someone that is willing to provide on-the-lot financing for new buyers. That's probably a hard stretch, since all of these loans are going to be "underwater" minutes after they are originated. There's not much appetite for that kind of deal any longer.

I suppose that a more conservative GM, while ultimately challenging to their corporate DNA, is a change that needs to happen. Competing on cars would change a culture that has depended on captive credit for captive customers. GM will still sell to car rental companies, and they still have years of GM credit card rebates to reward. They've got to some competing with Drive-Time.