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Local impact of Fed rate cut is uncertain

Jason Toncray sells used cars on New Circle Road in Lexington, but Wednesday his eye was on financial developments in Washington.

Toncray, sales and finance agent for Big Blue Autos, was hoping that the Federal Reserve's decision to cut the prime lending rate by half a point will loosen up lending and pump some life into the used-car business.

"It just happened earlier today (Wednesday), so we haven't seen anything much yet," he said. "But it should help as far as freeing things up for the lenders."

Toncray said Big Blue works with about "10 or 15 local lenders," virtually all of whom have tightened their guidelines in recent months, requiring customers to have higher credit scores and make higher down payments on cars.

He thinks the prime-rate cut might encourage them to ease up.

Others aren't so sure the rate cut — part of a move by the Fed and other central banks around the world to head off an international financial crisis — will have much immediate effect on consumer credit.

Gary Throckmorton, business development and housing specialist with Community Ventures Corp. in Lexington, noted that most consumer loans are not tied directly to the prime rate.

"You do have some consumer loans, such as home equity loans, that are tied to prime," Throckmorton said. "But I don't think you'll see a dramatic drop in loan rates for consumer products as a result of this."

Throckmorton said most banks probably will drop their prime lending rates, probably by Thursday, but that will mainly benefit commercial borrowers. He predicted banks aren't likely to immediately ease their commercial lending criteria.

"Even before this current situation, federal banking regulators were talking to banks about the quality of their loan portfolios," he noted. "That's caused the banks to be more conservative, and this rate drop is not going to have any direct change on that."

In Throckmorton's view, the prime cut's effect might be primarily psychological, simply encouraging more people to seek loans.

Steve Kelly, executive vice president at Lexington's Central Bank, also doesn't expect dramatic changes. Kelly, like Throckmorton, noted that most consumer lending does not hinge on the prime rate.

"We talked about this in a group meeting this morning ... and to be honest with you, as a community bank here in Central Kentucky, we don't see that it's going to have a great deal of an effect."

But that doesn't keep businessmen like Charles Johnson from hoping. Johnson, who manages Bourbon Motor Co. in Paris, said business at the used-car operation was off about 40 percent in September.

"The average customer can still get a loan," Johnson said. "But it's people who have had a few bumps in the road that can't get help."

He said one lender he deals with recently tacked 40 points onto the minimum credit score it requires on car loans.

"That's a big jump as far as trying to get someone qualified for a loan," he said. "The lenders have really raised the bar."

Johnson hopes the prime rate cut will help — and soon. "I've been in the car business since 1985, and it's always slow in the period leading up to a presidential election. But it's never been this bad."