(Update1) Auto Financing Gets a Jump Startby Tim Manni
The Bush Administration hasn’t let their latest investment go uncultivated. Their recent $17.4-billion investment into two of the Big Three was reinforced yesterday. Auto-loan financier GMAC (the financing arm of General Motors Corp.) received a $5 billion federal investment to increase auto sales by providing additional credit to consumers. The cash allows GMAC to ease their lending restrictions by extending financing to consumers with lower credit scores. The credit crisis required GMAC to constrict their lending requirements to consumers with a minimum credit score of 700; now the minimum has been reduced to 621.
As an added incentive to boost purchases, GM announced today that they plan to offer 0% financing to customers who qualify through January 5, 2009.
“The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers,” said GMAC President Bill Muir. “We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis. We will immediately put our renewed access to capital to use to facilitate the purchase of cars and trucks in the U.S.”
In exchange for the slice of the $700 billion bank rescue package, the government will receive preferred shares that pay an 8 percent dividend and warrants to purchase additional shares in return for the money, the department said.
We applaud the intentions of this loan, but whether this arrangement actually results in increased auto sales and consumer credit has yet to be seen. Yet, it makes a lot of sense to reinforce a larger loan with a smaller one.