Noise, Vibration, and Harshness: Rise and Fall of Consumer Finance

Tim Marrs

Maybe Adolf Hitler got it right. I don't mean the part about world domination, the master race, or all the illing and killing for which he's so justifiably reviled. I'm talking about consumer credit and the way the Third Reich got hard-working citizens to divert a little bit from their pay packet each week to purchase their very own Volkswagen. Theirs to use and enjoy, once they'd finished paying for it. In advance.

The practice seems exactly backward in a world where the idea is to sell as many cars as possible. Compare our U.S. system, pioneered by John Jakob Raskob for GM in the 1920s, wherein John Q. Public gets the car first and finishes paying later, in monthly installments. Hopefully before the car falls apart.

Aggressive consumer financing -not some fascist savings account but real, easy, right-here-now credit-became the great engine of American economic prosperity during the twentieth century. It has sold a lot of cars, agreeable finance being the mother's milk of car selling, in which immediate gratification is the whole point. The only things meant to concern us about the future are our ability to make payments and our next new car. This has been the American way longer than any of us have been alive.

But lately comes the unsettling news that American carmakers and banks have been losing their shirts giving us what we want pronto-with leases. Leasing-down from past levels but still some 20 percent of the U.S. car market-is installment lending on steroids. By financing only the difference between a car's sale price and its worth at lease end, the so-called residual value, consumers enjoy lower payments and can, in theory, finance more car for their money.

Buoyant residual values made easy-to-swallow lease deals ($199 a month!) possible. And although leasing often doesn't make as much financial sense as many think, it can when heavily subsidized by the manufacturer. With whom, it turns out, the real risk lies. Today, truck and SUV makers find themselves answering the question: what happens when the lease expires and the leased vehicle returns home, worth less than we said it would be?

The short answer is, you lose piles of money, as Ford found out when it previewed the industry's current misery with the Firestone tire/rollover scandal that came to the public's attention in 2000, shooting the bottom out of Explorer residuals for years to come. But that was nothing compared with now. Years of truck and SUV production are coming back to haunt Detroit in the form of bad leases, a veritable sea of high-riding, go-anywhere debt.

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