Despite the current economic turmoil, there are still consumers out there that need to buy a car. While the timing may not be perfect for this kind of major purchase, buyers could end up helping themselves in at least two ways.
September sales figures create a level playing (and losing) field
As I mentioned in a previous article, the September sales figures from the auto manufacturers have all been released. And from what we can tell here at Auto Credit Express, the numbers were nothing short of devastating. But unlike previous months, September's damage was hardly limited to the domestic automakers. Toyota's sales were down 32%, Honda was off by 24% and Nissan fell by 37% - proving that, in this market, no one is immune. In fact, only two auto companies managed to lose less than double-digit amounts year over year – Volkswagen went negative at 9.4%, while Mercedes-Benz parent company Daimler led the pack with only an 8.4% stumble.
Sources of consumer angst
A recent recurring University of Michigan Consumer Confidence Survey that normally covers an entire month took exception in September and drilled down to the last week (September 18-25) in order to make some kind of sense of consumer reaction to the economic mayhem that has occurred since then. During that week, it found that 79% of consumers expected bad times in the year ahead and 64% expect a rising unemployment rate.
But the bad news isn't just limited to consumer perception. According to CSM senior economist Charles Chesbrough, “As shocking as today's headlines are, the real story remains the very weak housing market, high fuel prices, inflation and the limited availability of credit.”
Making the Best of a Bad Situation
Despite the economic headwinds, there are still consumers out there that either need or want to buy a new vehicle. Taking the glass-half-full approach, there were still almost a million consumers who purchased a new car in September. So if you've made the decision that, in spite of everything, you still want a new car, what can be done to improve your odds on getting financed – and maybe even at the best rate your FICO score will allow?
Just as “plastics” was the cornerstone to success in the movie The Graduate, “equity” is one of the key issues that lenders look at when scrutinizing a loan application. Everything else being equal, the borrower with the lower loan to value ratio will get the approval and possibly even a lower interest rate. So how do you achieve equity?
The Down Payment
A down payment will give you equity in your new vehicle. Your down payment can come from any number of sources: cash, trade equity and/or vehicle rebates and dealer cash. Of the last two, dealer cash is preferable to a rebate, since a rebate reduces the selling price of the car, while dealer cash can be used as a down payment. Banks prefer money down, since it reflects a buyer's interest in equity, rather than a discount on the vehicle.
The buying process
As an example, let's say you're a buyer looking for a new vehicle with plenty of room for the family and good gas mileage that's fairly affordable. I know that SUV's and CUV's have been all the rage, but when you really take a look at it, nothing fills the bill like a minivan. They may have fallen out of favor lately, but so has the practice of emptying your wallet twice a week just to finance the daily commute.
Secondly, we want, if possible, a van that has consistently been rated a “recommended” buy from Consumer Reports, holds its resale value well, and currently has an uncharacteristic manufacturer's rebate or dealer cash assigned to it – the more, the better.
As an example, let's examine the Honda Odyssey. In base trim, the Odyssey LX has an MSRP of $25,860 plus $670 for destination charges. Normally, the Odyssey sells for close to MSRP. But Odyssey sales are currently down 14% for the year and, in September, year over year sales were down over 31%. If the Wall Street motto is “buy low sell high”, now might be a good time to make your move.
But wait, there's more
If you've done your homework and gone online to sites such as Edmunds.com, you'll notice that while Honda has an advertised below market interest rate, there's something that they don't list in the newspapers: $3,500 in dealer cash – the kind of rebate the banks like best.
A Possible Deal
Looking at a possible scenario, the invoice price on the Odyssey LX is $23,428. This figure doesn't include dealer holdback. Although the Odyssey normally sells close to MSRP, these aren't normal times. There's probably a good chance you can find a Honda dealer to part with an Odyssey at or near invoice. If you add the transportation costs and then deduct the dealer cash, you'll see that purchasing an Odyssey LX for $20,800 plus taxes and fees is not as much of a stretch as it was, say, a year ago. With an MSRP of $26,530, that's well over $5,000 in equity before you include your own cash or trade. Considering Honda's traditionally high resale value, depending on how much equity you could bring to the deal, there's a real good chance that throughout most of the loan, you could avoid being in a “negative equity” situation.
The Bottom Line
Remember that one of the important factors that banks consider is equity. The better your equity position in a car loan, the better the chance you will qualify for a loan and the better the chance you have of getting the best interest rate possible for your individual credit situation. Look for vehicles that retain their market value. Higher resale values mean that, for a given equity percentage, the higher the retained value in a car, the lower your chances of being “upside down” in your loan. Finally, do your homework. While manufacturers don't normally advertise their dealer cash, sites such as Edmunds.com and services such as those offered by Consumer Reports (for a small fee) can furnish you will up-to-date information.