Sub-Prime Car Loans Making a Come Back in the Automotive Industry

When homeowners with sub-prime mortgages started missing mortgage payments and went in default en masse during the second half of 2007 and almost all of 2008, banks and finance companies quickly tightened their lending standards for all types of loans so that only those with a good credit history and proof of an actual income could borrow money. For a while, it seemed that lenders had learned their lesson by lending money to people that couldn’t afford to repay the loans that they were taking out.

Apparently at least one bank has already forgotten that it’s not a good idea to lend money to people who have a history of not paying their bills. GMAC, General Motor’s financing arm, made a move to ease the requirements that consumers would have to meet so that consumers would be able to get loans to purchase new vehicles when they would have previously been denied because of having credit scores that were considered “sub-prime.” GMAC will also be reducing finance charges on loans of hoping to draw in more consumers.

Under GMAC’s new standards, consumers with credit scores as low as 620 will be considered. In October of 2008, GMAC increased their credit score requirement to 700, making it so that 40% of people that wanted to borrow money were not longer able to. On December 30^th, GMAC lowered that number down to 600.

Where did the money come from to make-allowance for the expected increased default rate and lower-financing charges? You and Me. GMAC received $5 billion from the federal government under the Troubled Assert Relief Plan (TARP) funds that were originally intended to purchase “toxic” mortgage backed securities from banks. However, then Treasury Secretary, Henry Paulson elected to use the funds in just about every way but buying mortgage-backed securities.

With the CEO of General Motors being ousted by the federal government and a decline of 45% in auto sales during the month of March, General Motors is in serious trouble. Chrysler was down 39%; Toyota was down 39%; and Honda was down 36%. The auto market overall was down an average of 37%. General Motors is hoping that they will be able to increase their sales by allowing just about everyone to get a loan on a new vehicle. This move will probably actually work in the short term, however it will only hurt GMAC down the line as consumers that can’t afford to buy a new car end up getting behind on their loans.

If you have a credit score in the sub-prime range and were previously not able to get a new vehicle because of financing, this doesn’t mean that you should rush out and go finance a new car now that GMAC will let you. If your credit score is in the low-to-mid 600’s that means you’ve demonstrated that you historically have not paid your debts back as you’ve agreed to. Instead, you should focus on getting your financial life in order before financing $30,000 on a new car with General Motors Auto Credit.