Auto Bailouts Provide New Deals for Car Buyers
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By Rick Newman, Seeking Alpha
With the auto bailout kicking into higher gear, General Motors (GM) and Chrysler aren't the only ones getting some help. Relief is flowing to car buyers, too.
The government has finally clarified what GM and Chrysler must do to get billions of dollars more in aid they need to stay in business and transform their operations. Both companies still face serious hurdles, and bankruptcy remains an option. But as the road map comes into focus, it's allowing both of the automakers—along with some competitors—to offer new deals aimed at boosting sales and turning around a moribund car market. And the government is helping out by backing warranties while the GM and Chrysler restructure.
The latest deals offer a safety net for consumers worried about losing their jobs and getting stuck with a new-car payments they can't afford. And the government guarantees provide a bit of confidence for buyers interested in GM or Chrysler vehicles. There are still some question marks, though. Here's what buyers should be thinking about:
Job-loss protections. GM and Ford (F) (which is not accepting any federal bailout money) are now offering a kind of free insurance against lost income, similar to a program Hyundai (HYMLF.PK) kicked off in January. In general, each program will cover your car or lease payment for a period of time if you lose your job after buying a car. To qualify, you have to prove you're eligible for state unemployment benefits and meet certain timing restrictions.
The details vary. Ford's plan covers up to 12 months of payments as high as $700 per month. GM's plan covers up to nine months of payments, up to $500 per month. Hyundai has been offering three months of payment protection, plus the right to return your car at no extra charge. Since GM and Ford have upped the ante, Hyundai may sweeten its offer, too. And expect other carmakers to match the terms, as they have with other promotions.
Keep in mind that gimmicky incentives are rarely a good reason in themselves to buy a car. And the manufacturers will play the usual games with these deals, setting expiration dates for the programs to goose sales, then possibly renewing them just as they're about to expire. Buyers should always think first about buying a vehicle that best meets their needs at a price that seems affordable. Still, the new payment-protection programs may help tip the balance for some buyers, especially if payment-protection programs become widespread.
Government warranties. Executives at the troubled Detroit automakers have long pointed out that nobody wants to buy a car from a company that might not be around in two or three years. President Obama seems to have heard that complaint, which is why his provisional bailout plan for GM and Chrysler includes a new government plan to honor warranties on GM and Chrysler cars purchased while the companies are restructuring.
In theory, the government-backed warranties mean that buyers shouldn't have to worry if they buy a car from GM or Chrysler and it malfunctions down the road—even if the manufacturer goes out of business. But there are some unstated concerns. For starters, the government has left open the possibility of bankruptcy for both companies if they don't make radical changes, fast. Obama's automotive task force has expressed confidence that GM can survive if it makes necessary changes, but it sees a future for Chrysler only if it mergers with the Italian automaker Fiat (FIATY.PK)—an iffy proposition. If either company fails, the government says it will "identify an auto service provider to supply warranty services."
Hmmm. Would the government warranty program work like the post office? Would you have to call a government hotline to get an appointment? There are no details yet, and of course everybody hopes the government will never have to get into the car-repair business. "There's the potential that this could be very problematic if the government starts administering warranties," says Jack Nerad of the car-research site kbb.com. Consumers hoping for more clarity may not have to wait that long: The government is giving GM 60 days to come up with a more aggressive viability plan and Chrysler 30 days to ink a deal with Fiat. At that point, the feds will either commit to billions in new loans or remand the automakers to the care of a bankruptcy court.
Resale values. The downside of cars that are heavily discounted today is that they'll be worth a lot less in a few years when you hope to trade them in or sell them. And one of the fears with regard to GM and Chrysler is that they'll start offering fire sales that will doom resale values.
GM has another new incentive to address such concerns. Its "vehicle value protection" program is meant to help buyers who want to trade in a new GM vehicle in a few years but end up "under water" on financing—in other words, they owe more than the market value of the car. If that happens, GM will write the consumer a check for $5,000 if it's a trade-in at a dealer and $2,500 if it's a private sale. But there are a few catches. You have to buy another GM vehicle to get the money. It applies only to cars purchased after April 1, 2009, and GM hasn't specified an end date, which could make it a confusing deal to administer. And artificially propping up the value of some GM cars could hurt the value of others, like those purchased before April 1.
There's a good chance that resale values for GM, and perhaps Chrysler, may never need such support. Obama's task force has encouraged the two automakers to end their practice of offering deep discounts to keep sales volumes up, one of the things that have driven down values. There are still other key issues, like raising and sustaining quality. But "resale values are not going to fall off a cliff," says Nerad. They're already fairly low compared with standard-setters like Honda (HMC) and Toyota (TM). And if the Detroit automakers shrink as the government is now demanding, that could actually raise values.
Scrappage incentives. Obama mentioned the possibility of "scrappage" incentives, but he offered few details except to say that he's working with Congress on a program to offer payouts designed to get older cars off the road. If you're hoping to get a big bounty for trading in a fairly new car, you can probably forget it. Scrappage programs are usually designed to get the oldest cars—which typically have the least safety equipment and pollute the most—off the road, which would dovetail with Obama's goals of introducing more green cars and reducing pollution. Since the biggest beneficiaries tend to be people with the oldest cars—people who may not be able to afford a new car anyway—this idea could have limited appeal to most consumers. But it might help clean the air and clear the breakdown lanes.
Tax breaks. Obama also touted tax rebates for car buyers that were passed as part of the huge stimulus bill in February. The administration hopes this will boost car sales by up to 100,000 this year, but so far, sales have continued to fall. That's obviously because of mounting job fears and spending cutbacks as the recession worsens.
If the economy recovers later this year, more buyers may be able to take advantage of the deal. Basically, it allows buyers to deduct from their income state and local sales tax paid on a new car, which might amount to $300 off the price of a typically priced new car. On its own, that's not enough to persuade most people to buy a new car, but if you're already planning to hit the showrooms, it might help. Some members of Congress would like to see additional tax rebates, though buyers should probably pay more attention to getting the car they want at a good price than waiting for further discounts courtesy of Washington.
Prudent waiting. With sales down for virtually every automaker and category this year, it's a buyer's market, and it should stay that way for months. Buyers who need a new car now but have been worried about losing their jobs may find that the new incentives are just what it takes to get them off the sidelines. But for others, there's probably little harm in waiting to see when the economy starts to recover, and whether GM and Chrysler fulfill the government's demands or end up headed for Chapter 11. With plenty of upheaval still ahead, there could be even better deals in the future.
