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Automakers and Consumers Face a Long Road Ahead

Mar 12, 2009
The global market meltdown has left many markets reeling. It seems that the Dow drops hundreds of points, on a daily basis and even the EU is feeling the effects of global recession. The world's automakers are, perhaps, among the hardest hit. The last round of financial bailouts included an enormous sum for US automakers, though even import automakers are feeling the pinch. It even seems that the bailout from the US federal government was insufficient for some automakers, who have returned to plead their case; hands outstretched for yet another handout.

Why are the automakers suffering so terribly? Much of it has to do with consumer spending habits and the current lack of credit. Consumers of all stripes are finding that it is harder and harder to get credit, even for small purchases. Credit card companies have tightened their belts, along with their requirements. Banks have begun offering loans only to those consumers with sterling credit, leaving the majority of US consumers out in the cold. This decline in credit that has spurred the decline in auto sales felt around the world, but most particularly in the US.

To truly understand the plight of the automobile manufacturers, one must understand why consumer spending has changed and how it has done so. During a recession, it is common practice for consumers to "tighten their belts," meaning they are choosier about where their money is spent. Because credit is difficult to get today, most consumers are left with cash as their only option for purchasing needed items. Few consumers have the cash or assets to purchase a new, or even a used, automobile. Consumers are purchasing more used items, buying store brand groceries and generally socking their hard-earned money away, to await a better day.

However, while this is undeniably the best option for consumers, it leaves retailers out in the cold. Reduced consumer spending hurts manufacturers around the world. Lower profits result in lost jobs, downsized production lines and, in the case of automobile makers, looming bankruptcy. While the federal handouts to the carmakers might stave off that seemingly inevitable fate, only a turnaround in consumer spending can accomplish this in the end. Automakers and their captive lenders have responded to the crisis with longer loan terms (some up to 84 months!). However, the problem lies in tighter lending criteria.

Because lenders are no longer looking at anything less than perfect credit, more than 60% of US citizens may find getting a new vehicle difficult, to say the least. That 60% figure represents the number of residents in the US with credit that falls below prime, subprime consumers, in other words. It is difficult to find a lender today who will offer a line of credit to even the highest rated of subprime consumers, much less those relegated to the lower echelons of the credit world.

There appears to be no easy fix to the credit crisis. Automakers continue to struggle, with sales slumping to all-time lows, while consumers focus more on making what they have last longer. One of the few solutions available to consumers is to rebuild their credit; however, even something as benign as that can be more than difficult in the current economy. With the recession deepening, more and more people are finding themselves laid off, or barely clinging to their jobs. Financial uncertainty does little to increase the health of the lending industry and the automakers are set firmly in the sights of the economic meltdown. Only time will tell if the automakers are able to survive the recession, or if the lending atmosphere will improve with the new federal stimulus package.
About the Author
Jacob Hertz is a regular blogger and writer on the credit industry for BadCredit.com. His articles on bad credit always accurately depict the status of the credit market for both consumers and lenders.
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