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Car Dealers On the Brink

Thousands of dealers may fail as credit dries up

By Truman Lewis
ConsumerAffairs.com

November 9, 2008

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As Congress prepares to race to the rescue of U.S. automakers, car dealers around the country are on the brink of bankruptcy, as tight credit makes it hard to sell cars and even harder to finance dealers' inventory of unsold cars and trucks.

“Sales are on the skids,” said Vicki Fabre of the Washington state auto dealers association. “Each month since August has been absolutely disastrous.” Fabre said she knows of 12 dealers who have folded in her state this year, with more likely to follow. She said 38 have failed since July 2006, according to the Spokane Spokesman-Review.

It's estimated that about 600 of the nation’s 22,000 car dealers have closed so far in 2008, and the total could go as high as 800 by year's end, according to Mark Johnson, a Seattle area auto industry consultant.

Congress and the incoming Obama Administration are likely to declare that, like major financial institutions, U.S. automakers are too big to fail. But, by itself, a bail-out of manufacturers does nothing to get cars moving off dealer lots.

Most acutely affected are dealers who rely on GMAC for financing. Like many other lenders, GMAC is having trouble raising money and, in response, has imposed higher interest rates, tighter credit requirements for car buyers and limits on dealers' credit lines. GMAC is 51% owned by Cerberus Capital, which also owns Chrysler. GM holds the remainder.

GMAC cutbacks

GMAC has sharply cut back on loans to car buyers. It said earlier this month it will no longer finance consumers with credit scores below 700 and has virtually stopped writing leases. Buyers with average and subprime credit are a big part of nearly every dealer's business and without financing, it's impossible to sell cars.

GMAC advises dealers to use alternatve sources of financing but that's easier said than done. In today's climate, banks aren't eager to write car loans to anyone with less than excellent credit.

Dealers are also desperate to find new lenders to finance their inventory but are finding slim pickings. With sales slow, many dealerships are losing money and aren't regarded as good credit risks by banks.

In Lakeport, Calif., Chevrolet dealer Kathy Fowler said GMAC's new credit policies and slow sales are threatening the survival of her business.

"I don't know if I'm going to be here when the dust settles but I'm going to put up one hell of a fight," she told Automotive News, a trade journal.

Credit unions

In Virginia, a group of dealers in Richmond have romanced local credit unions, normally regarded as the enemy. Dealerships usually try to steer customers away from credit unions because they can't mark up the interest rate on a credit union loan, as they can when working with GMAC or other "captive" lenders.

Richmond Hyundai dealer Mark Wright said he's trying to think outside the box in finding a solution to the dealers' dilemma. His group is hoping to arrange a joint promotion with local credit unions, who would have representatives on hand in showrooms to write loans during the promotion.

Write said that buyers with excellent credit can still get financing from Hyundai Motor Finance, potentially qualifying for 0% loans. He said Bank of America sometimes will pick up other customers, but with interest rates of 5.7% for a 48-month loan.

Dealers fail

Dealers large and small have already succumbed to the credit crisis. Bill Heard Enterprises, which billed itself as the world's largest Chevrolet dealer, went out of business in September, closing all 13 of its stores.

Lithia Motors Inc., a publicly-traded dealer based in Medford, Ore., announced last week that it had sold three more stores — two in Nebraska and one in Montana, as part of a restructuring plan in which the company plans to sell 29 of its 98 stores.

In Junction City, Ore., Gibson Motor Co. closed the doors to its Ford dealership last week after 87 years in business.

“It’s a pretty tough one for our family,” General Manager Matt Knox told the Eugene, Ore., Register-Guard. “It’s pretty tough to close a family business that’s been around that long.”

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