GM Slashes Financing Rates To Boost Sales

General Motors began offering zero percent financing on some vehicles Tuesday after its troubled lending unit got that $5 billion dollars in bailout money from the Treasury Department Monday night, reports CBS News business correspondent Anthony Mason.

The emergency loan will open up the credit spigot at GMAC, which had stopped lending to all but the most highly qualified borrowers.

When GM's sales plunged 45 percent in October, the company said the inability of its credit arm to lend money had cost it as many as 60,000 sales.

GMAC now says the bailout money will allow it to "resume close to normal levels of financing" effective immediately. The company has lowered its minimum credit score from 700 - on a scale of 800 - to 621 allowing tens of thousands more potential buyers access to credit.

That should give GM more customers, but even with $13 billion dollars in government bailout money, the world's biggest automaker doesn't have much time, Mason reports.

"The money they've been given only takes them through the end of March," says Angus McKenzie, editor of Motor Trend magazine. "And we still have to figure out how we're going to keep these companies viable, solvent. That hasn't been resolved yet."

The government funds, on the heels of the $17.4 billion automaker bailout approved by the Bush administration earlier this month, could provide relief to auto dealers.

"General Motors could not have survived without this," said Mason. "If the government was going to spend $13 billion to prop up GM, they had to spend the $5 billion to prop up GMAC."

Michael Martin, who owns Chevrolet and Saturn brand dealerships in Manassas, Va., said he thinks the loans will be key to turning around the auto industry, adding that GMAC's lifting of credit restrictions sets an example for banks that have yet to use their bailout funding to free up consumer loans.

"I think these things really spur consumer confidence too," said Martin, who had already seen customer traffic pickup at his dealerships on Tuesday. "People are saying it's good to see GMAC back in the marketplace. Whether it's just a euphoric feeling or not, at least it's a positive."

Vehicles sales have declined sharply this year, plunging 37 percent in November to their worst level in more than 26 years, with every major automaker reporting a drop of more than 30 percent. GM was among those worst hit, reporting a 41 percent slide for the month, with company executives blaming a lack of easily available credit.

GMAC said Tuesday that as a result of the government aid it will resume offering automotive financing to customers with credit scores as low as 621, eliminating restrictions put in place two months ago as a result of the tight credit markets that mandated a minimum score of 700.

Marc Cannon, a spokesman for AutoNation Inc., a Fort Lauderdale, Fla.-based auto retailer that encompasses 264 dealerships including 73 GM franchises, noted that consumers can faithfully pay their bills for years, but if they miss one or two payments along the way, their credit score can drop into the 600s.

"They're not lowering standards, they're bringing more people into the game," Cannon said of GMAC. "These people are still customers and they're still good people you want to help get into the right vehicle."

Scott Talbott, a financial services lobbyist in Washington, estimated that 49 million more Americans would have eligible credit scores under the loosened restrictions.

But he said it will still be tough to attract car buyers who are worried about their jobs.

"If unemployment rises people are going to reduce spending. So all of these programs are contingent upon the overall economy and the restoration of consumer confidence," Talbott said.

"A new car or home is wonderful, but a job is better."

U.S. sales of new vehicles, which are down about 16 percent through the end of November, are expected to drop again in 2009 as a result of the recession.

Joe Piane, general sales manager at Ostrom Chevrolet in the Los Angeles suburb of Montebello, said his dealership's sales had been "devastated" since mid-October, when GMAC's lack of money prompted it to tighten credit.

And even if the credit crunch eases, Piane believes consumers will be less likely to spend money they don't have.

"I'm a believer that we never had a big economic boom. We just had a lending quagmire," he said. "I don't think business is ever going to be back to usual."

Mark LaNeve, GM's vice president for GM North America vehicle sales, service and marketing, said GMAC's $5 billion in funding was crucial for the company to afford the zero-percent and low-interest financing on some vehicles.

On Tuesday, James Forrest stopped at Pat O'Brien Chevrolet in the Cleveland suburb of Willoughby Hills to pick up a 2008 Chevy Suburban LTZ that he and his wife purchased new last week.

Forrest, 41, said he was depending on the dealer to provide the best possible financing, which turned out to be through a bank. He said he was surprised that GMAC was not available when he made the deal Saturday, but was happy that other customers might be able to finance through the company.

"It's probably a very good thing for General Motors and consumers with credit lending standards having become very tight," he said.

In addition to the $5 billion for GMAC, the Treasury Department also will also lend up to $1 billion to GM so that the company can purchase additional equity that GMAC is planning to offer as part of its effort to raise more capital.

In exchange for the funding, the government will receive preferred shares that pay an 8 percent dividend and warrants to purchase additional shares in return for the money, the department said.

The funding follows GMAC's approval as a bank holding company, which qualified it for the government aid and is expected to help GMAC avoid filing for bankruptcy protection.

The Treasury did not require that GMAC engage in more lending as a condition for receiving the government investment, spokeswoman Brookly McLaughlin said.

The $6 billion in total assistance means that Treasury has now committed more than the first $350 billion from the $700 billion bank rescue program also known as the Troubled Asset Relief Program, or TARP. Under the law governing the program, the administration must ask Congress for the second half of the funds and Congress can vote to block their release.

A Treasury official said the financing for GMAC comes from the first $350 billion, since not all the allocated funds have been spent yet. For example, only about $162 billion from the $250 billion that was set aside in October for investment into the banks has been spent.

But the official added, "it's clear that Congress will need to release the remainder of the TARP."

The $5 billion investment in GMAC has already been completed. Treasury is seeking to finalize the $1 billion loan by Jan. 16.

This isn't the first time that the Bush administration has committed more than the first half of the bailout money. About $4 billion of the $17.4 billion in loans the administration promised Dec. 19 for GM and Chrysler LLC would have to be paid out of the second $350 billion.

But it is far from guaranteed that Congress will release the extra money. Lawmakers from both parties have criticized the Treasury Department for lax oversight of the funds it provided to banks and for not using some of the money to prevent home foreclosures.

Shares of GM closed up nearly 6 percent at $3.80.