When Edward Groening went shopping for a car last Thursday, his first stop was Ganley Chevrolet's new car lot in Cleveland. He test-drove a 2008 Impala and a brand-new Chevy Cobalt, and liked them both. With a loan, he could afford whichever one he chose. But like millions of American consumers, Groening decided that any new debt right now is just too risky. So on Friday he walked across the street to Ganley's used-car dealership. There he found a 2007 Impala with 13,000 miles that cost $5,000 less than new one. At that price, he could pay cash. "Now's a good time to buy, but it's a bad time to borrow," Groening, 75, said on Tuesday as the continuing credit crisis dominated the news.
For consumers, retailers, lenders and anyone else who depends on credit, these are worrisome times. Even the $700 billion bailout that President Bush signed last week to buy Wall Street's bad mortgage-backed debt was not enough to calm credit jitters. Consumer borrowing fell at an annual rate of 3.7% in August, the first decline in over a decade, the Federal Reserve reported yesterday. In a surprise coordinated move with central banks around the world, the Fed sliced interest by half a point on Wednesday morning before the markets opened.
In the car lots of Cleveland, people at the ground floor of the economy are getting nervous too. In an average month, 260 customers walk through the doors of Boyland Acura in Cleveland. That total dropped to 80 in August, says general sales manager Clayton Hrabik. The few remaining shoppers find that it's getting harder to secure a loan. "Once we get down to the meat and potatoes of their credit worthiness," Hrabik says, "they just can't afford it."
That's what Cleveland resident Mildred Maldonado realized last week when the timing belt of her 1994 Saturn broke, causing the engine to seize. She would like to borrow money for a used car. If her Saturn had died two months ago, perhaps she could have qualified. But Maldonado has a low credit score. And banks, nervous about a global credit crunch, are requiring down payments of up to 30%, according to several Cleveland dealers. Maldonado cannot afford that. So she begs relatives for rides. "I hate it, but there's nothing else I can do," says Maldonado, 49. With interest rates rising, "I'm so afraid to go to a car dealer because what happens if one month I can't afford my loan payment?"
Similar credit concerns have contributed to a 20% drop in sales at Marshall Ford in Mayfield Heights, an affluent Cleveland suburb, says owner Larry Elk. Leased vehicles typically make up half of Marshall's new-car business. As Ford, GM and other manufacturers take steps to cut back on car leases, Elk says he feels the pinch. "People are getting the message that leases aren't happening," he says. "If people don't have to buy a car, they're just holding off to see what happens."
Perhaps that's why sales of economy cars like the Hyundai Accent or Kia Rio, which people need whether the economy is flush or bust, remain steady. Sales dropped slightly last month at Halleen Kia in North Olmsted, a Cleveland suburb. But so far in October they're back to normal, even as credit tightens, says general manager Eric Halleen. "People who might have qualified for an 84-month loan this summer are getting cut back to 62 months," Halleen says, "but we're still able to get deals done."
Back at Ganley Chevrolet, the dealership's bank announced in a meeting yesterday morning that it will increase the floor plan rate — the interest on money that car dealers borrow to buy new inventory — by 1.5%. "Which forces me to have less inventory on hand," says Jim Helton, the general manager. "That makes it harder for me to sell cars, because I'm giving people fewer choices." The dealership's owners were planning this summer to spend millions of dollars on a complete renovation and expansion of the façade, showroom and service area. Rising credit costs, combined with slow truck and SUV sales, forced the dealership to shelve the entire project. "Customers are still coming in, but they're walking away without a car," says Helton. "And it's largely because of credit."