AUTO CREDIT

Easy Terms--A Dangerous Inducement

For the privilege of driving a record number of new cars out of dealer showrooms this year. Americans have run up a staggering bill with the auto-finance companies. In the first six months of 1955, while installment buying of appliances and other consumer goods rode along steadily at about $5.5 billion, auto debt jumped a thumping 21% to $12.6 billion. It has gone up about $500 million every month since February, and it is still climbing. With less than eight weeks to get rid of some 1,500,000 of this year's models, many of the nation's auto dealers are making easy terms easier than ever.

The steep rise in auto credit brought a flashing-red danger signal last week from General Motors Acceptance Corp., biggest U.S. auto-finance company. Said G.M.A.C. to G.M. dealers: "Some customers who should buy used cars are being induced through 'easy terms' to take new cars. And some people who ordinarily would buy a lower-priced new car are 'easy-termed' into a bigger, more expensive model."

To show what it meant, G.M.A.C. considered the case of a customer who takes a $2,400 car with 25% down and 30 months to pay (common terms nowadays). The moment the owner proudly drives his shiny new car home, it becomes a used car, and depreciates 20%. Thus for the first 97 months he has the car, he owes more than the car is worth (see chart). This is a danger period, says G.M.A.C., because "customers who have paid less than ten monthly payments on their cars account for 82% of G.M.A.C. new-car repossessions."

Another sharp word of caution to dealers came from their own National Automobile Dealers Association. ''To sign a contract which results in a buyer owing more than his car is worth--at any time during the terms of the contract--is business suicide," said NADA's newsletter to members. "The minute a customer finds that his car is bringing less on the open market than his outstanding balance, the stage is set for another repossession.'' Moreover, said NADA, terms of three years or five years keep customers out of the market too long. "In a business which depends on repeat trade, this can be fatal . . . It's up to dealers to put a stop to crazy credit."

Back of NADA's straight talk is its concern that the Government might restore wartime Regulation W, which set auto sale terms at one-third down and no more than 18 months to pay. Though no such regulation is in prospect now, the Federal Reserve Board last week summoned to Washington representatives of G.M.A.C., C.I.T. Financial Corp., and other auto-finance companies to find out how auto credit can be tightened.

While the financial branch of the auto business nervously chewed its fingernails in the back seat, automen in the driver's seat sped on to more production records, predicted that the total would reach 7.5 million cars this year, up a full 36% from 1954. With high wages and record employment, producers figure that U.S. workers can afford to go into debt. Only 9% of the nation's $266 billion disposable income goes into time payments, said a G.M. spokesman, but "14% or 15% with good credit would cause no damage."

The biggest worry for finance companies are the marginal buyers who are living beyond their incomes. In a Pennsylvania showroom last week, the wife of a $79-a-week machinist was fondly eying a $5,100 pink Lincoln Capri; in Denver, Oldsmobile Dealer Alan Hoskins told of an eager buyer who earned $400 monthly and wanted a '55 Olds. "We figured out his income after house payments, furniture payments, TV payments, and after the car payment," said Hoskins, "he'd be left with $20 a month to live. I just couldn't let him get in deeper."

But many an auto buyer is getting in over his head, e.g., the $58-a-week Boston clerk who is struggling to pay $50 a month for a Buick Special. Says a Cleveland Chrysler dealer: "With production what it is, we've had to reach down into the lower quality credit to keep sales moving. Now we have to use credit as an inducement, and this gets us into deals nobody would take a chance on before."

If auto credit has not already broken through the ceiling, it has definitely begun to crack the plaster.

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