Upside Down in an Upside-down Market

Through the years, at Driving Today, we have warned about the phenomenon of being "upside-down" in a car loan. Very simply, if you owe more on your loan than their vehicle is worth, then you are upside down. You might not even know it, and if you hold your car and make your payments through the conclusion of the loan, it probably doesn’t make much difference to you. But the severe recession we find ourselves in means that being "upside down" has serious ramifications, and consumers might find themselves caught in a double whammy. Let's look at how this insidious phenomenon affects individual consumers.

Most consumers find themselves upside down for a simple reason: the pursuit of the lowest monthly payment possible. There was a time when the "standard" auto loan was just 24 months. Then, as cars grew more expensive and lenders grew more lenient, loan terms stretched to three years, and four years; now, some industry data suggests the average car loan term is more than five years.

At the same time, in the past few years leading up to the current downturn, down payments shrank from an average of 20 percent to less than 5 percent, and "factory cash" often subsidized even that small down payment figure. Because of the long payment cycles and small down payments, a vast majority of car owners have just a tiny amount of equity (real ownership) of their cars during the first couple of years of ownership. Instead, for most, the finance institution is the actual owner. All of which would be essentially transparent if car buyers held their vehicles until they were paid off. But they don't, especially in these hard times when a loss of job or a change in pay might cause many to re-assess the vehicle they own.

Consumers who are carrying a five-year loan may want to downsize or get out of their auto-related loan altogether, but if they are upside down, it is a tricky and expensive process. Just to make the old vehicle and old loan go away, consumers might find they must pay several thousands of dollars because their car is worth that much less than the money they owe on their loan. That’s the whammy, and the double whammy comes because the value of their car has likely dropped still more thanks to the current recession. In the past, consumers could “roll” the unpaid balance on their previous vehicle into a new loan for a new vehicle, but that was one symptom of a loosey-goosey credit policy that helped get us into the recession in the first place. These days, lenders are very reluctant to make those loans because they are now considered what they should have been considered then: very risky.

So what’s a consumer to do? Well, if possible, we suggest hanging on to the car and paying through the end of the loan. It might not be easy, but this will be the best bet to maintain good credit status. Another possibility is to look for a private-party buyer for your car rather than trying to trade it in. You could get more for your car this way, which will help with what is euphemistically called “negative equity,” which is, in actuality, debt. If that fails you can enter into a negotiation with your finance company. Odds are, they want your car even less than you do, so you might be able to work out new loan terms that you can live with.

Five years ago, in this space, one of my Driving Today colleagues wrote, “The auto industry, which now seems to be fueling the upside-down trend, would also be a casualty [of loose credit policies] because as finance companies rein in their loan practices in response to more and more defaults, fewer people will qualify to buy new cars.” Now that has come to pass. We hope you’re not being caught in the vice.

The Pivotal Vehicles of 2009

If you surf the Net or read the papers, I don’t have to tell you that 2009 will be a challenging year for the world’s automakers. Not only are the famous American car companies on the brink of possible extinction, but as I write this, Toyota has just announced that it is shutting down every one of its Japanese factories for a period of 11 days. That unprecedented move by the company that most experts feel is the strongest in the global industry indicates how dire the past several months have been -- and how critical 2009 will be to car manufacturers and the auto industry as a whole. One of the biggest engines driving the world’s economy -- vehicle sales -- is sputtering, and if it doesn’t regain a healthy purr quickly, some mighty big companies could fall in its wake.

This is why 2009 might be the most interesting year in American automotive history. The Big Three automakers are at a crossroads that many are hoping is not a dead end, while many other giants of the global car industry are quaking as consumers around the world suddenly refuse to buy new vehicles. And if that is not enough, the industry is growing more complicated. For nearly 100 years, the typical car sold in America was powered by an engine fueled by gasoline, but now the engine bay is up for grabs. Clean diesels, plug-in hybrids, electrically driven vehicles, bio-fueled vehicles, even hydrogen fuel cells -- all are vying for their place in the sun, and consumers are left to do their best to sort it all out even as they try to figure out how to pay for their next chariot.

Against this backdrop, 2009 will be filled with important vehicle introductions, many of which raise as many questions as they provide answers. So here, without further ado, is Driving Today’s list of the most pivotal vehicles of 2009. (Some are 2009 models, some 2010, but all will be available for your purchase this year.)
 
Ford Flex Can Ford Motor Co. find high volume out of this much-touted model, or will it be another Ford model, like the Edge, that showed a great deal of promise only to gain lukewarm response in the market? We like many things about the Flex, but some consumers seem put off by its distinctive, squared-off styling and its price.

Hyundai Genesis Can Korea-based Hyundai really establish itself as a player in the luxury-car market? This attractive vehicle has the goods because it does its very best to channel top German sedans, but one wonders how luxury and near-luxury buyers will respond to a prestige car bearing the Hyundai brand.

Honda Insight Honda hates to lose market share in any category to any car company, but it especially hates to lose potential sales to Toyota. Thus, it has created the new incarnation of the hybrid Insight as an unapologetic Prius fighter, and it has very aggressive sales targets for the model. The potential difficulty is that Toyota has a new Prius waiting in the wings that promises even better fuel efficiency.

Kia Soul Can a Korean brand sell sizzle instead of price? The intriguingly designed Soul has a lot of people excited, and it seems like an excellent time to launch such a vehicle. If it can develop a Scion-like following, Kia will have hit a big home run.

Mercedes-Benz GL320 BLUE TEC To those of us who revel in fine engineering, BLUE TEC “clean diesel” strikes us as an excellent solution to fuel economy issues without the expensive complications presented by hybrid power trains. But the big question is, Will Americans accept diesels?

Volkswagen Jetta TDI Clean diesel at an affordable price, the VW Jetta TDI offers big advantages. Drivability is excellent, and the technology is straightforward, but broad consumer acceptance is far from guaranteed. Some Americans just plain won’t consider diesels, no matter how good they are.

Should You Waive the Waiver?

In these troubled times, facing the worst recession the country has encountered in at least seven years, the last thing you want to do is waste money. Yet when many of us sidle up to the rental car counter, that is exactly what we do. Though many of us possess at least enough financial sophistication to keep from bouncing checks, get our bills paid on time and maybe even plan for our retirement, when it comes to car rental waivers, we seem to have all the economic savvy of a baboon. Yet, it doesn't have to be that way.

First, let's help you get a grip on what the waivers actually are: protection from financial loss that might be worthwhile. Rental car companies sell waivers that cover liability (damage you cause to other people or property), collision (damage you cause to the vehicle you rented) and comprehensive claims (stolen vehicles, weather-related damage like that caused by hail or flooding and collisions with animals.) You might decide that not having to worry about these potential stumbling blocks has value to you.

How does it work? When you buy waivers, the rental car company gives up its right to collect damages from you. That's a good thing, because it is essentially insurance against a big claim if your rental minivan falls off that big cliff in Hawaii while you and your kids are admiring the view or if some dim-bulb keys your snazzy rental convertible because he accidently mistook you for his ex-wife. But, since buying waivers can add substantially to the cost of a rental (waivers can cost up to $50 per day, depending upon the rental company, vehicle and type purchased), it's important to learn whether you need them.

If you own or lease a car, you are almost certainly already paying for auto insurance, so a good first step before you rent a car is to find out what you're already paying for and how it might apply to a rental car. If you have what is often referred to in the insurance industry as "full coverage" on your personal automobile, which means you have comprehensive, collision and liability coverage, you should check with your agent or your company to see if that coverage extends to a rental vehicle. Very often it does, and if you're involved in a crash with a rental car, in most cases you would be liable only for your deductible on comprehensive or collision coverage, just as you would be in your personal vehicle. Additionally, you should check with your credit card company to learn its policies, because some companies provide you with "waiver" coverage at no charge if you use their card to rent the vehicle.

The key advice here is check with your insurance agent, insurance company and credit card provider. While these won't be the most exciting phone calls you will ever make, the 15 minutes you spend doing it could end up saving you $350 over the course of a week's vacation. Wouldn't you rather have that money in your pocket to stave off the ravages of the recession?

What's the Most Popular Car Color?

White is the new white. That is the conclusion to be drawn from the just-released DuPont Automotive Color Popularity Report. White is the top vehicle color choice in North America for the second straight year, and it is a strong player globally, but there is white and then there is white. The study noted that “white effects“ like pearl and iridescent finishes, which allow today's apparently more conservative consumers to differentiate their cars subtly, in part explain white's dominance.

White and white pearl accounted for 16 and 4 percent of the automotive market for exterior color, respectively, in the study. Black and silver, two colors that are strong globally, also turned in strong performances. Black and black effects scored 11 and 6 percent, while silver, which led the pack for six consecutive years, garnered a 17 percent share of the North American market.

An examination of color trends in North America shows that there is a continuing convergence of color choice globally, with color preferences becoming more homogeneous across the globe. Additionally, DuPont color experts see white as a “palette cleansing“ color, signaling a pause after a long-running trend (silver) and in advance of a new yet-to-be identified trend. The year 2007 also marked the end of silver's seven-year reign as top-dog color, coinciding closely with the two terms of soon-to-be-gone President George W. Bush.

“We're seeing basic colors like black, white and silver continuing in the lead, but consumers are looking for differentiation with tri-coat and other effects,“ said Karen Surcina, color marketing manager, DuPont Performance Coatings. “These colors and effects provide a higher degree of customization and luxury effect, which allow consumers a conservative differentiation from the traditional color palette.“

“While black, white and silver continue to remain strong, we are seeing interesting trends developing,“ Surcina said. “The popularity of true chromatic colors, such as blue and red, are on the rise, with blue growing worldwide as consumers look to more environmental themes and lifestyles.“

As DuPont reported earlier this year, blue is becoming more popular and currently ranks with 13 percent of the overall market among consumers in North America. Blue has garnered 12 to 13 percent of the market for the past few years and is a top-five color choice in every market with the exception of Brazil.

“Blue is being utilized as the 'new green' because it is well understood by people all over the world that blue can also represent the preservation of nature,“ said Leatrice Eiseman, executive director of the Pantone Color Institute and author of Color: Messages and Meanings. “Imagine a clear blue sky mirrored in a pristine blue lake, and you will get the picture. It is a universal favorite.“

While strong colors appear to be on the rise, neutrals seem to be waning in popularity. Silver and light gray shades still capture great interest from consumers, but in the long run, they show a decreasing tendency in almost all regions, according to Nancy Lockhart, DuPont color designer for North America. As we age, we show a decreasing tendency, too, but that's another story.

Dealers Crash as Economy Slows

Few people are going to shed tears for down-on-their-luck automobile dealers. Don’t expect Congress to appropriate billions of dollars to bail out faltering dealerships and help them merge their way back into solvency. After all, car dealers are among the most vilified professionals in the country, ranking right down there with personal injury lawyers and politicians on the loathsome scale. But there is little doubt that car dealers are hurting. In fact, it would not be surprising if more than 1,000 of them go out of business this year. After a decade and a half of salad years, 2008 has marked an incredibly rapid and painful turnaround.

What has caused so many dealers to call it quits this year? It is a combination of negative factors that one might describe as a perfect storm of bad news piled on top of bad news. This year started with predictions that auto sales would not be as good as they were in 2007, which was widely regarded in the industry as a so-so year, but through the first few months of the year, the industry largely held its own. Then came the oil price bubble, and with it, the incredibly quick run-up in fuel prices. That caused consumers to rethink their vehicle preferences totally, leaving dealers with too many SUVs, pickup trucks and luxury sedans and too few small cars. It also caused many consumers to decide to forget about buying a new car at all until gas prices eased.

Just as that started to happen, though, the housing crisis, which had been bubbling along beneath the surface, eroding individuals’ sense of well-being, prompted the failure of several large financial institutions, putting the credit markets in a tizzy. The politicians waded in trying to help the situation, but their dire pronouncements about the economy also scared many consumers out of the new-car market altogether. To add to the calamity, the failure of banks created chaos in the credit market, making it much more difficult for consumers to get car loans or leases. Then the general media dove in, trumpeting the erroneous message that if you wanted to get a car loan, you couldn’t get one.

Car sales reeled in August and plummeted in September as the result of this. The grim auto sales prompted talk of a deep recession or even a return of the Great Depression, sending stock prices on a steep and rapid slide. This, in turn, further frightened potential car buyers. Throw in the rumors that General Motors Corp. was on the verge of declaring bankruptcy, and you have something that might be termed worse than anybody’s worst-case scenario.

Many dealers, who depend on credit and consumer confidence to make their livings, were trapped in the collapse of both and buried so deep in the rubble that they realized they couldn’t climb their way out. Annette Sykora, head of the National Automobile Dealers Association, predicted that 700 dealers would close this year, and that might turn out to be very optimistic. Since large multilocation dealerships are the norm these days, if they get sick and die, they can take out scores of dealerships in a heartbeat. This is why estimates that 1,000 dealerships might close their doors this year and another 1,000 might do the same in 2009 are not exaggerations.

So what does this mean to the consumer? In the long run it means less choice and less competition, which could well translate into higher costs. For the short term, though, this is a buyers’ market as car dealers and the car manufacturers themselves struggle to keep from dipping below the waves for the last time by offering incredible deals. For those who can stomach the wild ride, this is actually a great time to buy a new car.