GMAC loosens credit to expand auto lending

updated 4:07 p.m. ET Dec. 30, 2008

WASHINGTON - The struggling financing arm of General Motors Corp., rescued by $5 billion in federal aid, plans to use some of the money to make cars and trucks more affordable to a larger pool of customers.

GMAC LLC on Tuesday promised to loosen its tight lending standards that have made loans harder to get for would-be buyers of GM vehicles. It's the first time that a financial institution has said it will use money from the $700 billion bank bailout to offer more affordable credit to consumers.

On Tuesday, Detroit-based GM said it will offer zero percent or low-interest financing on some slower-selling 2008 and 2009 models as part of a year-end sales push — a move made possible by the newly available cash at the financing arm.

The GMAC funding, on the heels of the $17.4 billion automaker bailout approved by the Bush administration earlier this month, gives some relief to auto dealers who had blamed the industry's steep drop in sales partially on a lack of affordable credit.

Michael Martin, who owns Chevrolet and Saturn brand dealerships in Manassas, Va., said he thinks the loans will be key to turning around the auto industry, adding that GMAC's loosening of credit sets an example for banks that have yet to use their bailout funding to free up consumer loans.

"I think these things really spur consumer confidence too," said Martin, who had already seen customer traffic pickup at his dealerships on Tuesday. "People are saying it's good to see GMAC back in the marketplace. Whether it's just a euphoric feeling or not at least it's a positive."

Vehicles sales have declined sharply this year, plunging 37 percent in November to their worst level in more than 26 years, with every major automaker reporting a drop of more than 30 percent. GM was among those worst hit, reporting a 41 percent slide for the month.

Video   GMAC loosens credit Dec. 30: CNBC interviews Autonation CEO Mike Jackson on GMAC’s announcement to widen auto lending. CNBC

GMAC said Tuesday that as a result of the government aid it will resume offering automotive financing to customers with credit scores as low as 621, eliminating restrictions put in place two months ago as a result of the tight credit markets that mandated a minimum score of 700, an exceptionally good score.

Marc Cannon, a spokesman for AutoNation Inc., a Fort Lauderdale, Fla.-based auto retailer that encompasses 264 dealerships including 73 GM franchises, noted that consumers can faithfully pay their bills for years, but if they miss one or two payments along the way, their credit score can drop into the 600s.

"They're not lowering standards, they're bringing more people into the game," Cannon said of GMAC. "These people are still customers and they're still good people you want to help get into the right vehicle."

Other dealers weren't as optimistic.

Joe Piane, general sales manager at Ostrom Chevrolet in the Los Angeles suburb of Montebello, said his dealership's sales had been "devastated" since mid-October, when GMAC's lack of money prompted it to tighten credit.

And even if the credit crunch eases, Piane believes consumers will be less likely to spend money they don't have.

"I'm a believer that we never had a big economic boom. We just had a lending quagmire," he said. "I don't think business is ever going to be back to usual."

Mark LaNeve, GM's vice president for GM North America vehicle sales, service and marketing, said GMAC's $5 billion in loans was crucial for the company to afford the zero-percent and low-interest financing on some vehicles.

GM said Tuesday that it will offer zero-percent financing for up to 60 months on the 2008 Chevrolet TrailBlazer, GMC Envoy and Saab 9-7X sport utility vehicles. The Saab 9-3 and 9-5 sedans also qualify for zero-percent financing.

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