An inflatable gorilla beckoned from the roof of Don Brown Chevrolet in St. Louis, servers doled out bowls of pasta and a salesman urged potential customers to “come on up under the canopy and put your hands on” a new set of wheels.
But sitting across from a salesman in a quiet back room, Adrian Clark could see it would not be that easy. This was the ninth or tenth dealership for Clark. Every one offered a variation on the discouragement he was getting here: Without $1,000 for a down payment, no loan.
“It’s just rough times right now,” Clark said. “Rough times.”
For Clark, and for a nation of consumers heavily dependent on credit, there are growing signs that those rough times could prove to be more than just a temporary problem, that they could be the beginning of a stark, new reality.
Is America’s long era of easy credit over?
Experts say that even when the current credit crunch eases, the nation may finally 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, a senior analyst at Bankrate.com. “This entire credit crunch is a wakeup 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 also are likely to rise.
Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.
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. They aggressively marketed it as a necessity, a way for the smart consumer to leverage themselves into a better lifestyle.
The financial meltdown has made clear the role an increasingly global economy played in facilitating U.S. consumers’ borrowing, with banks packaging and selling debt to investors, providing cash to people who once would have been considered too risky to get a loan.
The expansion of credit has, in many ways, been a good thing. It has allowed many more people to buy homes. At a time when household incomes have stagnated, borrowing has made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.
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 — like car lease payments and homeowner’s insurance — are added in, about one of every five household dollars is now 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.
• Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.
The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA. The lack of savings is a sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.
Now, many families spend virtually all of their incomes covering living expenses, and even that is not enough.
The new era of tighter credit will largely be a mandate, as consumers are forced to adjust to tougher rules and tighter limits. But consumers have also begun showing signs of a change in mind-set, putting off purchases, buying less expensive substitutes, going out to eat less, and rethinking their propensity to do so on credit.
Consumer borrowing fell for the first time in more than a decade in August, the Federal Reserve reported this week. The decline, at annual rate of 3.7 percent, reflected a sharp drop in the category of borrowing including auto loans and a smaller decline in the category including credit cards.
Like gasoline prices, the availability of credit should improve once the current crisis eases. But consumers are confronting what some see as a long-term change.
Dolores Holmes took out an interest-only $515,000 loan two years ago to buy a bed and breakfast in Lambertville, N.J. Once the business took root, she planned to refinance into a fixed-rate loan and cut her cost. But as the economy declined, she had trouble filling rooms.
That increased pressure on her to find a way to cut her mortgage payments. But her accountant and financial adviser say her hopes of getting a more affordable loan are slim without a profit that convinces a lender she’s worth the risk.
“I’ve been cutting back on anything personal,” she said. “It’s like everything I have has to go back into the business.”
Borrowing against the future has always been part of the American story.
“How did those religious English people get to this country on the Mayflower? They came on what we would call the installment plan,” said Lendol Calder, author of “Financing the American Dream: A Cultural History of Consumer Credit.”was doing so because their home’s value had plunged from $310,000 to $141,200.
The couple had been poised to refinish their basement to add a bedroom and make it suitable for visitors — a place to have people over and play cards, shoot pool and cook. Now that plan has been shelved.
“It’s kind of like we had this $40,000 cushion there, that if anything happened we had an emergency fund,” David Piet said. “At least we had a source of funds there, and now that’s gone. That has caused us to cut back and try to put more money into savings, and be cautious on what we’re spending money on.”
The Piets are comfortable enough financially to have retired early. But for consumers of more modest means the new restrictions on credit are cutting into their ability to make what would have been relatively ordinary purchases.
Clark, the steamfitter shopping for a car, returned home to Fairview Heights, Mo., in January after a 12-month tour of duty with the U.S. Army in Afghanistan. He found a new job and expected that a regular paycheck would be enough to secure a loan for the car he needs to commute.
At the dealership last weekend, Clark and his wife, Flora Rivera, settled on a Dodge Stratus with 8,000 miles on the odometer. But the dealership was looking for a $1,000 downpayment and Clark had just $200.
The problem is that Clark, 22, has almost no credit history, a problem compounded by the time he spent serving overseas. A few months ago, multiple banks would have been happy to give such a consumer a loan, salesman Scott Ziegler said. But now only companies offering pricier subprime loans are interested, and that still doesn’t solve the problem of the downpayment.
Clark left the dealership without a loan, but decided to put down his $200 as a deposit and try to find another source for the remainder of the downpayment. In recent weeks, such scenarios have become the norm, said the dealership’s loan manager, Jarrod Campbell.
“I’m getting a lot more customers who are saying, ‘I’ve been to 10 other car lots,”’ Campbell said, “and no one will give me a loan.”
AP Business Writers Dave Carpenter in Chicago, Christopher Leonard in St. Louis and Sarah Skidmore in Portland, Ore. contributed to this report.
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