Watch out, G.M. — that’s a tightrope you’re walking
General Motors just spent $3.5 billion to buy Americredit, a subprime lender. I guess it’s good news — first, that G.M. actually HAS $3.5 billion (probably from the huge revenues it’s been reaping in China), and second, that it can now give Americans an easier path to buying its cars.
But the news still sent a shiver down my spine. Subprime lending — isn’t that what toppled several once-stellar financial firms, and came close to toppling the entire economy?
G.M.’s motives, of course, are clear. This from today’s New York Times:
“Our dealers have been telling us that not having an in-house finance arm hurt our ability to finance certain loans and leases,” Edward E. Whitacre Jr., G.M.’s chief executive, said in a conference call. “It hurt our ability to meet rising customer demand for G.M. cars and trucks. Now we’re going to fix that.”
In fact, some experts say that the ability to extend financing could boost G.M.’s domestic sales by 20%. Hard to argue with that.
What worries me, though, is that dealers make money when they sell cars, so won’t they be monumentally tempted to extend credit to people with poor chances of paying it back? Is there a real difference between a sub-prime car loan and a sub-prime mortgage?
I’m probably over-reacting. If someone defaults on a $15,000 loan, it’s not as dangerous to the company — or to the economy — as when someone defaults on a $500,000 loan. Nor is repossessing and reselling a car as complicated as foreclosing on a mortgage. And there are an awful lot of people with low credit scores who, in fact, are safe bets for repaying loans. Jesse Toprak, the vice president of industry trends and insights at TrueCar.com, makes a good case for that:
Mr. Toprak said many consumers have low credit scores because of isolated negative events like late bill payments but otherwise pose a low risk of default. As a result, they are being turned away by lenders who tightened their credit standards after subprime mortgages helped cause the recession.
“They’re basically being ignored simply because of the paranoia. It used to be there was lending like drunken sailors, but now it’s the opposite,” Mr. Toprak said. “If G.M. can fill in that void, there’s a big potential for return for them.”
Fersure. But why would we believe that Americredit and GM dealers would be any better at filtering out the potential deadbeats from the safe bets? Are they really that much smarter — and that much more conservative — than the pre-recession mortage brokers? I have no reason to believe they are. And as I said above, a dealer will do most anything to make a sale.
Again, I hope I’m having an unwarranted, knee-jerk negative reaction. But I don’t feel good about this…