Is Buying an American Car Smart Now?

Four-figure cash incentives, 0% financing promotions and a government guarantee that warrantees will be honored still may not be enough to lure skittish car buyers to the lots of dealers selling General Motors (GM) and Chrysler-brand autos.

It could end up being their loss. Not only can consumers nab great deals, but they can also do so with the peace of mind that, should one of these auto makers go into bankruptcy, they will be covered. (The government said it would guarantee warranties while the two auto makers work on restructuring their operations.)

Obviously it’s understandable why car shoppers would be concerned. General Motors has been given 60 days to dramatically reduce its outstanding debts, or face government-structured bankruptcy proceedings. (GM received $13.4 billion in loans already this year but still carries $47.9 billion in debt.) Meanwhile, Chrysler, which received $4 billion in government loans earlier this year, requested another $5 billion in February and recently warned that it may need to file for Chapter 11 bankruptcy protection if that aid is not received.

Despite the gloomy business outlook, car shoppers have little to worry about. “Very ironically, there’s never been a better time to buy,” says James Brock, a marketing professor at Miami University in Oxford, Ohio. “Now they’re practically giving the damn things away.”

Here’s what would-be buyers and current owners need to know:

“Certainly, the word ‘bankruptcy’ should raise a few flags; that’s only natural,” says Lincoln Merrihew, vice president of business solutions for market researcher TNS North America. But filing for Chapter 11 bankruptcy protection doesn’t mean GM or Chrysler would cease operations -- even temporarily. “They’re not going to suddenly disappear,” he says. Filing for bankruptcy protection allows a company some temporary relief from its debts while it restructures.

And it's highly likely that GM, which is at greater risk for filing, would be able to emerge from bankruptcy. “The goal of all these [government] machinations is to have a GM that survives and becomes a strong competitor in the marketplace,” says Jack Nerad, executive editorial director for Kelley Blue Book.

President Obama promised Monday to back GM and Chrysler warranties should either company go under. A new Treasury Department program, funded with cash from the manufacturers and the government, will step in to cover warranties if the auto maker goes defunct and cannot cover the cost itself.

“Prices are not going to fall off a cliff,” says Nerad. Consumers selling a GM- or Chrysler-brand car while either company is in bankruptcy may get slightly less money when they sell, but it shouldn't be a significant change.

GM has already put three of its brands -- Saab, Saturn and Hummer – on the auction block. If there are no bidders, the company plans to phase out Hummer later this year, followed by Saturn in 2011. Vehicles made by orphaned brands tend to fetch less on the secondary market, says Merrihew, because there is no guarantee of parts availability down the line. (For more on how a brand sale or shutdown would affect car owners, click here.)

Going outside GM's financing arm, GMAC, to get a loan may prove to be a lot more difficult -- and more costly, says Merrihew. “Banks might be more hesitant to lend,” he says. With the company’s future uncertain, they may worry that they won't receive the full amount owed for a vehicle. To secure the riskier transaction, lenders could demand a higher interest rate or require a bigger down payment. Shop around to make sure you’re getting the best deal.

If GM or Chrysler is able to relieve some debt and find firmer financial footing while under bankruptcy protection, they are likely to use some of that freed-up cash for incentives in order to entice consumers back into the market, says Nerad.

GM has already taken steps to do so. It announced Monday that it would compensate buyers for some lost resale value and let consumers who lose their jobs return new vehicles without penalty. Ford (F) followed suit Tuesday, offering to cover payments for up to 12 months should a buyer become unemployed. (For more on layoff protection plans, click here.)