Auto lending giant GMAC took steps Wednesday to shore up struggling auto dealers and moved to boost auto sales by reducing financing charges and extending loans to subprime buyers with lower credit scores.
GMAC said it is earmarking $5 billion in the next two months as part of its effort to lure more consumers into the crippled car market. It also will take immediate steps to help auto dealers.
The auto and home mortgage finance company said it will accept auto loan applications for customers with credit bureau scores under 620, which is considered subprime.
Last October, GMAC increased the minimum credit score to 700 — barring 40 percent of GM’s customers from obtaining financing through GMAC. On Dec. 30, GMAC dropped its requirements to 620 — one day after it received a $5 billion cash infusion from the Troubled Asset Relief Program, and the Treasury Department loaned nearly $1 billion to General Motors Corp. to invest in GMAC.
John McEleney, president of the National Automobile Dealers Association, called GMAC’s moves a “very positive step.” He estimated that at least 20 percent of GM customers didn’t have the credit scores to get financing.
“It’s going to help both dealers and make credit available to a wider range of customers,” he said.
GMAC will cut interest rates on new vehicle financing for well-qualified customers by half a percentage point.
“Customers will still need to qualify, but this will expand the credit available to a broader spectrum of buyers,” GMAC said in announcing the credit changes.
Interest rates on used car loans also will be reduced, the company said.
Wednesday’s announcement came just hours before GM revealed that its sales plunged 45 percent in March. GMAC is a former GM unit, but the Detroit automaker still retains a minority stake. It must reduce its stake to 7.4 percent by late this month, placing the rest in trust.
GMAC, rapped by critics as being too tough on dealers, will waive some dealer payments and help them sell aging inventory.
“Dealers have told us that cash flow is critical right now,” said GMAC President Bill Muir. “We want to do everything possible to help dealers sell their inventory of cars and trucks, while preserving their working capital during the next couple of months.”
GMAC said it will end so-called “curtailment” payments for aging inventory this month. Dealers are required to repay a portion of the wholesale loan after a vehicle has been in a dealer’s inventory for a few months.
In a recent letter to Treasury Secretary Timothy Geithner, 18 members of Congress said GM dealerships in their districts had complained of GMAC’s “harsh, unfair financial demands.”
“We urge you to take measures that will stop GMAC from unreasonably imposing restrictions on access to capital that ultimately drives car dealerships out of business,” said the congressmen, including House Financial Services chairman Barney Frank.
The letter said a small GM dealership with a $1 million inventory — about 40 vehicles — may need to make a $50,000 monthly curtailment payment.
GM is trying to sharply cut its dealer count, by at least 25 percent by 2012 to 4,700. GM had 6,246 dealers at the end of 2008 and that number had fallen to 6,122 by Monday, according to a report GM filed with the Treasury.