General Motors' Greatest Innovation? Not Cars, Credit
Sorry to disappoint all of you who think that the two-person Segway is the most innovative thing GM has produced in its long history — it seems that the company's most important new idea was consumer credit. More specifically, convincing a nation of thrifty debt-averse tightwads that taking on debt was socially acceptable. Yes, it's true. We weren't always a bunch of debt junkies.
From Marketplace Money:
Here's how GM helped spawn the America way of debt. In 1919 GM was trying to catch up with the world's No. one automaker.
Music: The little old Ford, it rambled right along, the little old Ford rambled right along...
Henry Ford's Model-T was plain, simple and relatively cheap. It came in one color: black. To buy one, you paid cash up front. GM cars were more colorful, and more stylish and more expensive. David Farber says GM gained on Ford by starting a credit war.
FARBER: General Motors creates automobile loans. 1919, 1920, they create the General Motors Acceptance Corporation. And that allows people to buy more expensive cars — by going into debt.
Henry Ford didn't like the idea of offering cars on credit, and resisted.
Henry Ford thought he knew the American consumer better than executives at GM. But David Farber says Ford couldn't quite see that attitudes about credit and debt were changing.
Farber: You had a country in some ways based on the virtues of avoiding luxury, avoiding debt, of being thrifty, and then suddenly in the 20th century as manufacturers are able to produce so many goods they begin to wrestle with the possibility that well, maybe it's good to go into debt. Maybe it's good to have luxury items
Autos spurred the credit boom [Marketplace Money]
(Photo:alyates44)
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Comments:
Gee, thanks General Motors!
So, duh, the US auto buyer finally wakes up & realizes that the dealers were selling credit not cars. Heck, they'd have sold cabbages if they could finance them over 48 months!
Rule #3 - Finance through your bank or a credit union, not the same guys trying to sell you the car in the first place.
@T Axel Jones: Rule #1 - Don't finance stuff that depreciates. Pay cash.
(Unless it's 0% (or almost 0%) financing and you get a higher rate of return by keeping your money in savings and blah blah blah...)
Funny little fact, the "General Motors Acceptance Corporation" that is mentioned in the first quote is what GMAC stand for.
And If you have been paying attention GMAC is also involved in the home loan business (and more) and is right now knee deep in bail out money. While GMAC and GM are no longer one company its still funny to see how we have to bail out BOTH companies, and now according to the article they are the root of all our problems.
@Zuhaib Mirza Siddique: I thought the love of money was the root of all our problems...oh wait, never mind.
@T Axel Jones: Rule #1 should just be "Make sure you're not getting screwed" - financing through the dealership isn't inherently bad, just make sure you're getting a good deal.
@jscott73: Paying cash isn't always feasible for people who don't have the $8,000 it takes for a used sedan, especially when you factor in reliability.
Maybe GM realized that their customers wanted to buy a car they couldn't afford, but they also couldn't arrange a loan from their bank. There was way less cash available in those days, and banks were notoriously stingy.
So GM side-stepped the issue by starting their own banking "system" in the form of GMAC. They made it acceptable for car buyers to go into debt in order to finance the purchase of their new car.
This was a marketing innovation and quite ingenious for its time.
@jscott73: Rule #1a: if you have to finance something that depreciates, make sure your insurance will cover you fully while you're upside down.
Sorry, Singer created credit for the masses, back in the 1850s. It was the only way a family could purchase such an expensive item, and the only way a company could mass produce and sell such an expensive item. GM just applied the idea to automobiles. (See Sharon Murphy, "The Advertising of Installment Plans", Essays in History.
I always wondered why people say that when negotiating to buy a car, negotiate as if you are going to take out a loan and then surprise them that you want to pay in cash.
@pecan 3.14159265: I hear ya but the less Americans finance their cars the cheaper cars will have to get, they have only gotten so expensive with the onslaught of easy financing.
I paid cash for my $3200 car over a year ago and it's been very reliable, only in the shop twice, once to fix something that was bad when I bought the car and I knew it, once to replace the timing belt (routine maintenance).
I just think easy financing has led to overpriced goods to begin with and now we can all see how that has ended, weaning everyone off credit won't be easy but I think it should be a priority.
@Zuhaib Mirza Siddique: So I'm guessing that GMAC insurance is associated with GM as well? Anyone know how much money they make off that?
I love how this comes off as some sort of shocking new development. Since when has taking out a line of credit for a purchase that immediately loses a large percentage of its value a good idea?
@godawgs7: I think it's because if the dealer knows they're going to make money off you because of the price of the car itself and the interest, they'll be more willing to negotiate down on the price of the car (especially if you'll still be paying above manufacturer's price) and make more money with the interest through financing.
@philipbarrett: Yeah, not a huge surprise. Every time I've ever gone in to a car dealership, they've been able to show me the cupholders, and that's about it. If I ask them about the engine, they're lucky to be able to guess how many cylinders it has. I just love it every time I see a dealer posting on craigslist, claiming their car has a V4 in it.
@T Axel Jones: Except VW credit offered me a rate several percent lower than my bank did. I guess my bank is a tightwad.
@Nakko: There's no substitute for shopping around.
Also, you can get great deals on financing and price as dealers try to move the end of the year models
@pecan 3.14159265: Well the dealer isn't be making the money off the interest, but rather, in selling the loan.
With the way the manufacturer is tied in with the credit, often there are additional rebates when financing through them ... in which case, do proceed with the financing, then pay it all off on the very first payment. You get the additional rebate but as a "cash" transaction. Just make sure there's no prepayment penalty, which aren't as common with automobile financing.
@philipbarrett: What are my cabbage payments if I go to 72 months? Can I roll in the extended warranty?
@pecan 3.14159265: GMAC is only 49% owned by GM, so technically it's a different company, but as a large shareholder, they do take about 49% of the profit.
@Nakko:
If it was lower interest for the same term, great news for you!
There are some tards out there who only look at the monthly payment, everything else be damned.
This sort of ignores that GM was innovative and made the world's best cars for many years.
GM also was a pioneer of automotive marketing with its the tiered "step-up" branding and such. Too bad this branding is now defunct and GM still hesitates to do anything about it. It still works in China--Buicks are highly desirable there!
Even now, the Corvette shows that the US can make a beautiful, cheap, and world-class race car. Their new small diesel engine design is nothing short of a breakthrough (I hope they can produce it).
Sure, they gave up their soul in the 80s and 90s and made a bunch of regrettable garbage, but they also have contributed a ton to the US (e.g., WWII, technical and design innovations).
I hope the best can be saved and the worst can be jettisoned.
@Canino: I'll have to take that to my manager, I know we can work something out though.
Do you have a lettuce or cauliflower you're looking to trade?
Credit default swaps and other such exotic economic silliness is the direct cause of our current problems, but yes, loan culture made it all possible.
Nope, sorry. I asked about that myself when I made my last car purchase. Understandably, dealers feel a little skittish about allowing someone to drive away with their merchandise based soley on a credit card imprint. I was allowed to make a down payment using the AmEx, but I had to settle the difference within three days (since I was paying cash).
@philipbarrett: If you purchase your cabbage with your credit card it will take you longer than that.
@jscott73: Yep. And thats why so many people complain about depreciation in those first couple years. What the car is actually worth, in real money (not "finance") is much closer to used sticker prices than new sticker prices.
@yagisencho: Actually it's AMEX that forbids it. I called them & apparently they've had too many "oops, changed my mind, want a charge back please" incidents.
"It's all GM's fault!!!!!!11111"
Right. Anyone else you'd like to accuse? Samsung?
What about the Federal Reserve slashing interest rates? Low interest rates give people a disincentive to save their money and an incentive to borrow money and spend it.
Wait, that's common sense. Let's just bash General Motors.
@WOPDingo:
When it's better than the alternative?
I financed my current vehicle with a 5-year loan (and payed it off in 18 months). It replaced a lemon that had cost me several grand in repair bills. Paying a little in interest was a better deal than keeping the lemon or walking.
This story is not news. The scary part of the story is that someone just realized it. GM has for a long time seemed more like a consumer credit company that uses its second-rate cars to suck people into its profitable financing deals. It's gotten steadily more so with each decade.
In today's car market, only people with money can afford used cars. Everybody else has to settle for a new car, with nothing down, and payments spread over 5 or more years, during most of which the car isn't worth what's owed against it. When the car starts going downhill, often the customer's sole option is to trade it in for another new car with nothing down again, and restart over again, being even more upside down in loan to value. It's not just GM, though. Ford does it too, and other automakers too, I assume.
The Segway s_ _ _ _ and we all know it. I wouldn't completely blame GM on our credit woes. Downwardly mobile workers have no choice but to borrow to buy a car to get to work because GM bought out all the transit companies back in the fifties!
DOWn, baby, DOWn!
I hate GMAC. Back when I even considered a Saturn vehicle GMAC had this special deal...a balloon payment plan. It was a lease without any of the perks that might come with a lease. "Oh, just trade in the vehicle in 3 years and you avoid the balloon payment," is what the salesman said.
I ran, not walked, to a 3% loan being offered by Honda at the time. Never considered a GM or Saturn vehicle ever again.
ever notice the GM card has been taken over by HSBC the worst card comapny there is and even harder to deal with. I'll never deal with them again and they are hooked up with best buy LOOK OUT TGT
Karma's a bitch, eh?
When the salesman says, wait here at the desk while I go talk to my manager, DO NOT do any talking about the car because they are listening in on the speakerphone on the desk and can hear everything you have to say.
The time spent talking to the manager is directly correllated to whether you are sitting there silent or are discussing the car and what kind of deals you would like to make/get.
Good grief.
Buying cars on credit is not a bad thing. Credit is not a bad thing. Overdoing it is a bad thing. If two people with the same income both buy cars on credit yet one gets a new car every 10 years while the other gets a new car every 3 years, the two are completely different financial boats.
You can be thrifty and use credit. The current crisis was not caused by use of credit, it was caused by people taking on more debt than they could afford, urged on by banks and other companies that made money off the pile of debt, and with the media and society in general constantly bombarding people with images, articles and TV shows about $100,000 kitchen remodels, luxury vacation resorts, making $80,000 in 6 weeks flipping houses, $50,000 sweet 16 parties, etc. etc. etc.
If future events must unfold perfectly in order for you to avoid financial disaster (e.g. you need 40% home appreciation in 5 years to make money on that investment property you bought, or you're assuming a future promotion will let you afford the BMW you just leased, or you spend more than you make every month assuming your year end bonus will be there to make up the difference) you are eventually going to be screwed.
What? GM did help create the Great Depression! I knews it!