We have been warned for months now that the bankruptcy of any of the big three auto manufacturers would have widespread consequences for the entire economy. Last week, Chrysler officially filed for a reorganization bankruptcy. The idea behind a reorganization is for a company to be able to restructure its debts and resume its operations. In some cases, over time, many companies are able to emerge from a reorganization stronger and more viable. In other cases, the companies do not succeed and they are liquidated. No one knows which will happen with Chrysler. I will tell you that if I were a betting man, I believe there is little hope for a turnaround here.
The problem that America's big three auto manufacturers are facing is really rather simple. American consumers are no longer willing to over extend themselves financially to buy a new car every 2 to 3 years. In most countries, people will drive a vehicle for five years or longer. In some European countries the average age of a vehicle on the road is eight years old or older. Most Americans are unsure of their financial future. They are unwilling to sign up for five years or more of payments to get into the latest, greatest, shiny new car. I drive a 2002 Ford escape that has nearly 190,000 miles on it. The reaction I get from people about my car has become comical. I saw a friend the other day that I had not seen for about a year. The first thing he said was, “Wow you're still driving that same Ford." Driving an older car that has no payments is no longer considered a financial strategy employed by a select few odd-balls like Jim Paris. In today's blog I will to address some of the questions that are coming in relating to the Chrysler bankruptcy. These are very good questions, and I think the answers will be beneficial even to those that do not currently own a Chrysler vehicle.
1. Will The Warranty On My Chrysler Vehicle Be Honored?
The United States Government has promised to make good on warranties for General Motors and Chrysler (both receiving recent government bail-outs in the billions). While there are no specific details on this, the idea is that the government would step in to honor the warranty on your Chrysler vehicle if the company ceases operations. While this may provide some level of comfort, I am a bit leery. Our government is big on throwing out promises and short on specifics as to how they are going to deliver on them (ever heard of something called Social Security?). Even if the government does live up to its promise, where will you take your Chrysler to get work done under the warranty? I can't even imagine the process that local mechanics would have to go through to submit claim forms to the government to be paid for their services. This would probably end up being very similar to the nightmare that doctors go through trying to collect from Medicare. It would also open the door to massive fraud and abuse. How many scam artists would start local repair shops and begin submitting bogus claims to the government for “repairs” done on Chrysler vehicles? The long and short of this is that if you already own a Chrysler vehicle, there's really nothing you can do about it now. On the other hand, I would not run out and buy a new Chrysler on the basis of the government's promise to honor the warranty. The only way that I might be persuaded to buy a Chrysler is if the prices became so ridiculously low that I was willing to accept the reality that there may not be a warranty that I can collect on. That might be a reasonable trade-off if they were almost giving away their vehicles (which I doubt will happen). Anything short of that, there is a zero percent chance that you will see me buying a Chrysler anytime soon.
2. If Chrysler Goes Under Will I Be Able To Get Parts To Repair My Chrysler Vehicle?
Even if Chrysler does cease operations at some point, I am not persuaded that there will be a shortage of replacement parts. There are plenty of manufacturers of auto parts for Chrysler and other major vehicle brands. In fact, I think there may shortly be a boom in manufacturing of auto parts since people are now committed to keeping their cars on the road longer. Friends of mine in the auto repair business tell me that they have never been busier. This reinforces my core belief that the cycle of buying new cars in our country is going to be substantially extended.
3. What Will happen To My Financing If Chrysler Goes Out Of Business?
I found it funny today when visiting the website of Chrysler Financial that their headline is Chrysler Financial is not in bankruptcy. I guess there are more than a few people wondering if they still have to make the payments on their loan or lease agreement with Chrysler Financial. The answer is a big yes. Even if Chrysler Financial ends up in bankruptcy, this does not absolve you of the obligation of making your loan or lease payment. Your debt will become an asset of the bankruptcy and you will still owe the money. Believe me, there is no chance that you're going to be able to miss even one payment without it being noticed. In fact, it is more likely than ever that Chrysler Financial will be aggressively collecting its debts. In any case, Chrysler Financial is a separate entity from Chrysler and at this point is not in bankruptcy.
4. Will The Chrysler Bankruptcy Affect Me If I don’t Own A Chrysler?
Many pundits have been suggesting that the failure of one of the major three auto manufacturers would create a domino effect and thus cause the failure of all of them. It has further been predicted that the failure of even one of the big three, would mean the collapse of most auto parts suppliers and repair parts for all makes and models will be in short supply. I am not persuaded one bit by this argument. This actually makes no sense if you think it through. The idea that people will be lining up at auto parts stores to buy replacement parts and no one will be around to manufacture them is absurd. So long as there is a demand for auto parts, there will be suppliers. As I've already mentioned, not only will they survive, but I believe that there will be a major expansion in companies that supply repair parts for used automobiles.
5. With All Of This Uncertainty In The Auto Industry, What Should I Do If I Need To Buy A Car?
My advice on this has really not changed even in light of recent circumstances. I am a huge advocate of buying used cars and driving them as long as you can keep them on the road. Because of the economy, there is a glut of used cars on the market. If you have even a modest sum of money ($3,000-$5,000), you can pick up a decent car that will last for many years if maintained properly. While some look at this as a “buying opportunity” to jump into the new car market, I am on the complete other side of that argument. For most, the cheapest car you will ever drive is the one you're driving right now. Despite the hot offers an aggressive advertising, my best advice is to not purchase a car that you can not pay cash for. Taking on a 3 to 5 year loan in this economic environment is probably the most unwise move anyone can make right now.
Join my discussion about this topic on Twitter. Would you buy a Chrysler right now if you could get a really good deal? Follow this discussion on Twitter or use the comments section below. The early response on this is that most people would buy a Chrysler if the price was right. I guess the devil is in the details on that equation.
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