Lender Lower Cutoff Rates: Good News for Bad Credit

GM bailout money helps some borrowers

 The first reaction to the economic crisis for many lenders was to stop lending money to borrowers with less than perfect credit. However, the auto and mortgage financing division of General Motors Corp. is relaxing its credit restriction for potential car buyers after receiving a $5 billion initial investment from the U.S. Treasury Department.

The lessened credit restrictions are a result of a government agreement to invest a total of $6 billion in GMAC. The Treasury has purchased $5 billion in equity from GMAC and will loan GM up to $1 billion more in order to purchase stock.

 621 is the new 700

GMAC Financial Services has announced that after several months of only lending to customers with FICO scores of 700 or higher, it will now expand their retail auto financing to include those with lower scores. On December 30, GMAC stated that the new cutoff FICO number for lending has been lowered to 621. 

 “The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers,” explained GMAC President Bill Muir. He continued to say that GMAC will continue to carefully choose who they lend to, but that the credit crisis will be lessened by these actions. Muir also pointed out that by taking this action GMAC is helping to “facilitate the purchase of cars and trucks in the U.S.”

Consumers with credit scores of 620 or less will still have to find financing elsewhere, while those with higher scores will now find themselves considered as prime borrowers by GMAC. Despite new campaigns offering interest rates as low as 0% for up to 60 months on select vehicles, borrowers can still expect that the lower their score, the more of a down payment they will be expected to pay.

Car sales drop and drop

 U.S. car and truck sales were down 16.3% in 2008, with GM vehicles seeing a 22% downturn in the sales of its vehicles. According to Muir, GMAC finances about 75% of the inventories at GM dealers. It also remains as a major source of loans for auto purchases. However, with the tightening credit standards last year, GMAC saw a November sales drop of 41%.