With Credit Drying Up, Car Buyers Bring Cash

The few consumers who are buying new cars are being forced into bigger down payments or all-cash deals in the latest sign of how the credit crisis is battering an already weak auto market.

Car dealership in Miami
Car dealership in Miami

The average down payment on financed car purchases has jumped nearly $1,000, about 20 percent, since July, and all-cash transactions are at their highest point in three years, according to data from the research firm J. D. Power & Associates.

Tighter credit was a crucial factor in the stunning 26.6-percent drop in September vehicle sales in the United States.

In September, sales fell below 1 million vehicles for the first time in 15 years, but analysts fear the market could be even worse in October.

“Consumers were already staying away from the showrooms, and when you add in the credit crisis it’s like a one-two punch,” said Tom Libby, chief market analyst for J. D. Power.

Mr. Libby said his firm was preparing to further cut its sales forecasts. J. D. Power had forecast 14.2 million new-auto sales this year and 14.3 million in 2009.

“Those are going to be revised down,” he said. “And they’re going to go down significantly.”

Consumers are increasingly being frozen out of the credit market, as banks and other financial institutions continue to tighten their lending practices.

The result is that many consumers are making larger down payments to secure a loan.

The average down payment for nonluxury vehicles was $4,946 in the first seven months of this year, according to J. D. Power. By the end of September, however, the average down payment was $5,915.

And with credit increasingly hard to come by, many car buyers are paying cash. About 31 percent of all nonluxury sales in the last week of September were all-cash deals, the highest level since 2005, Mr. Libby said.

“Dealers are simply requiring more cash up front and providing far less credit,” he said.

Cutbacks on leasing by auto finance companies are also taking a toll on overall sales. In the first seven months of this year, 16.2 percent of nonluxury sales were lease deals. The total dropped to 9.3 percent, however, in the last week of September.

While credit is drying up for consumers, dealers are also struggling to secure financing for their vehicle inventories.

The finance companies of General Motors, Ford Motor and Chrysler have recently increased the interest rates they charge their dealers.

Combined with falling sales from a slow economy and high gas prices, the credit crisis is pushing many dealers over the edge.

About 600 of the 20,770 franchised new-car dealers in the country have closed this year, the largest shakeout in the dealer system since the early 1990s.

In a speech Tuesday in Detroit, the leader of the National Auto Dealers Association said the unrest on Wall Street was wreaking havoc on the auto market.

“Credit is the lifeblood of our industry,” said the chairwoman, Annette Sykora, who is also a principal in two Ford dealerships in Texas.

“Dealerships need it to finance inventory from manufacturers. Consumers need it to buy cars.”

She said that typically more than 90 percent of buyers finance their vehicles. But now, some dealers have been unable to get financing even for car buyers with exemplary credit scores.

“Dealers who have been in this business for decades say they have never seen anything like this before,” she said. “We’ve heard about dealers who couldn’t get financing for buyers with credit scores in the upper 700s. That’s just unprecedented.”

The financial health of thousands of dealers is at risk, and more closures will have a ripple effect in communities across the United States.

A study released Tuesday showed that profits at dealerships were sinking.

The study, by the auto research Web site Edmunds.com, said dealer profits from new-vehicle sales had dropped as much as 25 percent from 2007.

Ms. Sykora said the financial bailout package passed by Congress was vital to stabilizing the credit markets.

“It’s too early to know whether the fix will work,” she said. “One thing is certain: this action is better than no action.”