TAKING STOCK: Cars and loans

Dear Mr. Berko:

I bought 300 shares of General Motors at $26 over two years ago, even though you said it was a dumb investment. Auto sales have been taking off, and now I'm asking whether you think it would be a good investment to buy 600 shares of Ford or more General Motors.

-MT, Erie, Pa.

Dear MT:

No, a hundred times no, don't buy General Motors (GM-$33.72) or Ford Motor Co. (F-$14.85). I doubt either will repeat its 2014 sales performance. And I doubt the consumer has enough purchasing power remaining for a repeat performance in 2015. Frankly, I suggest you sell the 300 GM shares I told you not to buy at $26 in October 2012.

When I visit some of the big cities in the southeastern part of the country, I'm impressed by the furlong-long lines of gleaming new (and old) cars blanketing the myriad car lots that dot busy corners and major highways of these cities. Automobiles seem to be among the few assets of which the prices are not affected by supply and demand. If they were, everyone would be able to buy a good used car for a few hundred dollars. It seems that there are more cars than there are cats, dogs and goats, and people in management at GM, Ford, Chrysler, Toyota are watching auto sales zoom. Americans are hungry for new cars, and dealers sold nearly 17 million cars in 2014 while raking in prodigious profits. Trucks and SUVs represented 53 percent of vehicle sales last year, and most buyers are purchasing their rides with numerous add-ons, enabling car dealers to book triple-markup profits. Dealers are offering attractive discounts, car loans with no money down, zero-interest (big laugh) loans, cash rebates, iPads, TV sets, vacations in the Bahamas, loans that require no payments for six months, free maintenance for 12 months and a year's worth of gas. And while broader consumer spending is showing signs of fatigue, auto sales are sizzling and setting records. But not for long.

Auto loans today are as easy to get as home mortgages were a decade ago. Today almost anybody with a voice and a pulse who is able to scratch an X on a sales contract can get financing for a car. It seems that auto dealers, banks and credit unions consider auto loans to be an entitlement, so very few applicants are turned down. Unfortunately, Americans are taking on new debt at record levels. Today's average household credit card debt is $16,085; the average home mortgage is $155,000; and the typical wage earner takes home about $36,000, which is less than he earned prior to the Great Recession. Most folks have less spendable incomes and are abusing their credit as a drunk does with a bottle of bourbon. I know of a 26-year-old unemployed dope smoker who recently bought a nearly new Ford F-150 for $33,600, using his father's credit card for the $3,000 down payment. He financed his new ride-which boasts a blasting stereo, fancy rims and extra-huge tires-over 84 monthly payments. I'll wager a pocketful of 50s to a pig penny that this kid will default in the next two to three years and that his loan balance will exceed the market value of his truck.

Today's auto loans are securitized, bundled and sold to yield hungry investors, just as Goldman Sachs, Citigroup and Bank of America misrepresented, packaged and sold subprime mortgage securities to investors who then lost their shirts. The huge New England Federal Credit Union and America First Credit Union, plus other lenders, now offer car loans for eight years (96 months) at rates between 3.24 percent and 6.25 percent. Those loans last longer than most marriages today. Meanwhile, Card Hub expects over $31 billion in credit card defaults for 2015 and believes that the default rate will approach $37 billion in 2016. As I said, the consumer is making less today than he was before the recession, and his debt is at record levels. So the $64 question is: How much more can the consumer borrow until he's out of breath?

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Tue, Jan 27, 2015