More bad news...or not? GMAC cuts loans based on credit score

GMAC logoOver the years General Motors dealers have been able to count on GMAC, the lending company owned in part by GM, to provide loans to car buyers at their dealerships.

Before the economy started its nosedive, GMAC-originated loans provided financing for almost half of GM car buyers. But now that the company is concerned about stability, GMAC is cutting back on who it will give loans to. In a letter dated Oct. 13, it announced to all GM dealers that it would no longer make vehicle loans for anyone with a credit score below 700, this coming on the heels of previous cuts which have already cost GM 10,000 buyers a month.

Any move to tighten up credit restrictions by a major corporation will affect parties in different ways; we are going to look at how it will affect the major players below.
  • GMAC
  • Consumers
  • Dealers
  • Banks and Credit Unions
GMAC isn't alone in toughening up loan requirements, and even if the move costs dealers a few sales, there's nothing wrong with this decision. In Fact, I'm encouraged to see another company shoring up its borrower requirements to put the company on better financial ground. I think everyone can agree that we don't need to see another lender fail, especially one in which an automaker owns a large portion! Times are already hard enough for GM without its lending arm going under.

From a consumer standpoint, all I have to say is, "So What?" Financing your vehicle through the dealer is hardly the best way to pay for your new car. In many cases credit unions and local banks are still offering credit to those with decent scores and can meet or beat the dealer's terms. Just because GMAC is cutting back doesn't mean you can't get a car at all, although you should ask yourself if it's really necessary to buy one if your finances are already that tight. If anything, this may tilt the deal in your favor since dealers will be trying to make up for lost sales. At the very least it removes the shell game of the dealer financier claiming you're in the 550 range and having his buddy pull some strings to get you approved at the 600 credit score.

From an individual dealer standpoint, this kind decision has to hurt big time. Many dealers are already carrying inventories on unattractive gas guzzlers, and fighting for a shrinking pool of buyers can't be welcome news for sales staff. Even though they will still be moving cars for buyers who finance through another lender, the dealers are sure to miss out on money made on loans they originate. When you couple this with the fact that in the same letter GMAC cut bonuses for high volume dealerships, it becomes evident that dealers are in for even tougher times.

Thankfully, at least one business stands to win in this shake-up as consumers in many cases still need cars and will pursue financing at local banks or credit unions. Locally, credit unions and community banks are stepping in to fill the auto financing void, and while you still need a decent credit history, you may have slightly more leeway in securing a loan due to these hometown institutions factoring in your character.

Either way you look at it, this move to tighten lending restrictions is a mixed bag for the economy; sure more sales would seem to give a boost overall, but if a GMAC becomes the next federally-owned lender, I think that markets would suffer more than they will from fewer sales. If you do plan to buy a car soon, be sure to check out all of your financing options, and make sure you pull your own credit score to see what rate you should be getting. Finally, before you go, find out when the real best time to buy a car is, straight from the dealer's mouth.
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