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Tight credit putting buyer expectations into perspective

Isis Madera, left, bought a 2009 Matrix from Modesto Toyota. Madera said she doesn’t want to have to start paying for repairs on her Honda as it ages.
Isis Madera, left, bought a 2009 Matrix from Modesto Toyota. Madera said she doesn’t want to have to start paying for repairs on her Honda as it ages. Modesto Bee

Anna Cohen, 25, squinted and frowned at the 2001 Honda Civic before settling.

"I wanted a Volvo, but I guess I can't afford it," the Turlock woman said Sunday. "They told me it was 'out of my budget.' But somehow it was within my little brother's budget last year."

A year ago, Cohen's brother drove off a lot in a 2002 Volvo S40. But a year ago, credit was much easier to obtain and the country wasn't in a financial crisis.

"He said it was easy to get a loan, but I can't buy a car like his," she said.

Everywhere Cohen looked, she was told she'd have to come up with 10 percent to 20 percent of the sale price to get the car she wanted. She did -- after scaling back her expectations to a seven-year-old Civic.

It may seem unreasonable for someone with an average credit score and $1,000 in her pocket to expect to drive away in a Volvo, but she probably would have gotten a loan for it if she had shopped around a few months ago, said Abraham Tarverdi of Metric Motors Modesto.

"It's a lot harder to find financing now," he said. "The days of easy credit and people buying a car just because they want it are over."

Experts say that even when the tight credit eases, the nation finally may have maxed out its reliance on borrowed cash.

Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

"I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future comes back into vogue," said Greg McBride, senior analyst at bankrate.com.

"This entire credit crunch is a wake-up call to anybody who was attempting to borrow their way to prosperity."

A prolonged period of tighter credit is ahead, experts say. U.S. consumers will find it much harder to get a credit card and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and down payments will be required. Interest rates are likely to rise.

Dennis Noland of Roberts Auto Sales, however, fumes at reports that make people think loan and lease options have dried up.

"Nothing has really changed," he said. "The majority of the people we deal with can still get financing at the same rate with the same requirements. If they can afford the car, they can get financing for it."

The 'perfect customer'

But other dealerships say lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers.

"You basically have to be the perfect customer. You have to have long-term credit, no past-due payments and a 10 to 20 percent down payment," said George Ismail of Modesto Toyota. "It used to be a person with a pulse could get a lease. That's not so anymore."

The changes cap three decades in which U.S. consumers -- along with businesses and government -- have run up ever-increasing debt.

Americans became accustomed to financing purchases large and small with plentiful credit cards, easily approved loans for cars and the latest conveniences, and by siphoning the equity in their homes.

Lenders did far more than just make credit plentiful, however. They aggressively marketed it as a way for smart consumers to leverage themselves into a better lifestyle.

Banks also loaned cash to people who once would have been considered too risky. Loans were packaged and sold to investors. That facilitated more borrowing by U.S. consumers, but as the financial meltdown has made clear, the risk was spread worldwide.

In some ways, the expansion of credit was a good thing. As household incomes stagnated, borrowing made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.

High cost of debt

But all that borrowing came at a heavy cost. Americans are more reliant on debt then ever before.

The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations -- car lease payments and homeowner's insurance -- are added in, about one in every five household dollars is claimed by bills.

The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled -- to $61,000 per person -- from what it was before the law was passed.

"We are going to have to cut back," said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C., think tank. "We've really been living beyond our means."

The Associated Press contributed to this report.

Bee staff writer Eve Hightower can be reached at ehightower@modbee.com or 578-2382.

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