Auto sector feels pinch of credit crunch

Roland Jones Associate editor • Profile • E-mail

Driving a sporty car was nice, but with high gas prices and inflation pinching at his pocketbook, Jorge Valdes decided last October to get rid of his white BMW 525i sedan when the $700-a-month lease payments became too much to bear.

Valdes turned to LeaseTrader.com, an online service that allows one car-lease owner to transfer it to another before it expires. He passed on the remaining 16 months of his 36-month lease to another driver, allowing him to lease a new, cheaper car and lower his monthly car payments.

“With gas and insurance I was paying over $1,000 a month to drive a vehicle and it didn’t make any sense,” said the 27-year-old firefighter who lives in Miami.

“The economy was one of my main reasons for getting rid of the lease,” he continued. “Gas prices are going through the roof and the economy isn’t getting any better; everyone hopes it will, but I don’t see it getting any better any time soon. There’s nothing out there that’s going to pick us up.”

Just as delinquencies and defaults are rising in the housing sector, problems also are mounting for auto lenders as consumers like Valdes look to get out of their costly car leases or struggle to make their car-loan payments.

Rising inflation, high gas prices and a tightening home mortgage market have driven up auto-loan delinquencies, according to Fitch Ratings, the credit-rating agency. The number of Americans who are more than 60 days late on their car-loan payments rose to a 10-year high in January, Fitch recently reported, attributing the rise in late payments to “increasing pressure on the consumer” in a weakening economy.

The problem is so acute it could weigh on the overall U.S. economy, according to Lawrence B. Lindsey, former director of the National Economic Council and now CEO of the Lindsey Group, an economic advisory company in Washington. He told CNBC last week that “the next shoe to drop” in the credit crunch could be the auto-loan sector.

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“We’re talking about a half-trillion-dollar industry, and if you take away a quarter of it that’s one point of [gross domestic product],” he said. “Washington is focused on the [tax rebate] checks they’re about to send out, and that’s great because a $1,200 check is a down payment on a car, but if you can’t borrow the other $25,000 to buy the car then you can’t buy it, period — that’s why the credit channel is the most important thing to focus on.”

On Tuesday, automakers reported double-digit U.S. sales declines for March as demand for trucks and sport utility vehicles plummeted and consumers refrained from buying new cars. General Motors said its U.S. sales fell 19 percent, while Ford’s sales dropped 14 percent. Jim Farley, Ford’s sales and marketing chief, said in a conference call with reporters and analysts that the company is concerned the shrinking availability of consumer credit will continue to hurt sales and that the second quarter could be more difficult than the first.

Carol Kaplan, spokeswoman for the American Bankers Association, a trade group for the banking industry, notes that auto loans make up half of all U.S. consumer loans, excluding mortgages.

“This certainly tells us what’s going on in the economy,” Kaplan said. “We can say without question that auto loan delinquencies are rising and that we expect them to continue to rise."

She added that delinquencies for other consumer loans tracked by the trade group, including credit cards, home equity loans and lines of credit and bank cards, also are rising.

The rise in delinquencies comes at a time when more Americans are stretching to buy cars, opting to purchase longer loans to be able to make their monthly payments and also afford other everyday expenditures, such as mortgage payments and credit card bills.

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