A big reason auto sales have tanked in recent months is the sharp rise in unemployment. Folks who are worried about losing their jobs aren't likely to take on the added risk of a five-year car loan.
Hyundai Motor America unveiled a novel approach to the problem over the weekend. Dubbed the Hyundai Assurance Program, the South Korean automaker said people who finance or lease a new Hyundai during the next 12 months could return the car if they "experience an involuntary loss of income" within one year of the purchase date.
"That's a new one," said Erich Merkle, an industry analyst at consulting firm Crowe Horwath in Grand Rapids, Mich. "It's an indication of the very tough sales environment right now."
Hyundai, with a 3% share of the U.S. market in 2008, certainly needs customers. Its sales were down 48% last month compared with a year earlier -- one of the worst showings among automakers.
Hyundai said it would absorb as much as $7,500 in negative equity (the difference between what a vehicle is worth and what is owed on it) for buyers who opt to walk away from their loans. Customers who pay cash for their vehicles don't qualify for the program.
Depreciation can reduce a new car's value by 25% or more during the first year of ownership. But since Hyundai's lineup skews toward low- and moderately priced cars, the $7,500 should be enough to cover the lost value on most Hyundai vehicles, save for the top-of-the-line Genesis sedan, which has a starting sticker price of around $32,000, and the Santa Fe sport utility vehicle.
According to a Hyundai news release, buyers can return a vehicle for no extra charge within 12 months of purchase if any of the following occurs:
Involuntary job loss;
Loss of driver's license for medical reasons;
Job transfer overseas;
Personal bankruptcy filing by a self-employed worker;
To qualify, the buyer must have made at least two scheduled payments on the loan or lease and be current on the payments, as well as pay the amount over the $7,500 negative-equity threshold. The value of the vehicle will be determined by the dealer, who will be allowed to re-sell the vehicle, Hyundai said. Returning the car shouldn't have a negative effect on the customer's credit, the automaker added.
Steven Schwartz, finance director at Keyes Hyundai in Van Nuys, said his dealership received a few calls Monday inquiring about the promotion, although it hadn't generated any new sales yet.
Schwartz offers an example of how the program works:
A customer buys a 2008 Santa Fe SUV and gets a five-year loan for the total purchase price of $22,300 (including rebates, taxes etc.). About $350 of the $430 monthly payment goes toward the principal on the loan. After nine months, he's paid about $3,200 in principal on the loan and owes $19,100.
The buyer then loses his job and returns the vehicle to Hyundai. Assuming the used Santa Fe is appraised at $16,000, the buyer would be "under water" on his loan by $3,100 -- but that's easily within the $7,500 negative-equity threshold provided by Hyundai. He would owe nothing.
Hyundai rolled out the new offer with an ad blitz during the weekend's NFL playoff games, tapping into the national economic angst with the tagline, "We're all in this together and we'll get through it together."
"We understand consumers' hesitance to commit to large purchases in today's economic environment," John Krafcik, acting chief executive of Fountain Valley-based Hyundai Motor America, said in a statement.
It's unclear whether other car companies will follow Hyundai's lead. Automakers and dealers are already offering a raft of incentives -- no-interest financing, cash rebates, even two-for-one sales.
Hyundai is no stranger to aggressive promotions. The 10-year, 100,000-mile warranty it introduced a decade ago helped overcome concerns about the reliability of its vehicles.
"Hyundai has a history of making unprecedented moves when necessary to try to get people into the showrooms," said Karl Brauer, editor in chief at Edmunds.com.