Consumer Credit Taking Hold in Mexico : Reform: Cars, credit cards and housing become more attainable. But some wonder if the country is ready for such extravagance.

LEON, Mexico —  Imagine waking up one morning to find that most of your credit cards have been canceled and that the limits on those you still have are slashed in half.

Your car dealer calls to say the dealership no longer offers loans, but that you can pay for an auto on a sort of layaway plan.

Then, the bank notifies you that its mortgage department is closed and suggests that you apply to your employer or union--provided, of course, that you are willing to live in a government housing project and that you have a 20% cash down payment, payable before construction begins.

That is what life used to be like in Mexico.

“Two years ago, there was no consumer credit,” recalled housing developer Carlos F. Valenzuela. “Mortgages were hard to get, and other kinds of loans simply did not exist.”

But today, with their country digging out of debt, Mexicans are digging themselves in, discovering the joys and banes of consumer credit as their nation’s much-touted economic reforms begin to reach the middle and working classes.

Young families finally are able to buy homes and borrow money to furnish them. Credit card business is up 40%. New-car sales are booming, as motorists learn that they can pick out a car and drive it off the lot the same day.

There is even a new movie called “Easy Monthly Payments,” the chronicle of a borrowing and buying spree that leaves a pair of newlyweds living far beyond their means.

The specter of mounting consumer debt worries some economists, especially in a country where interest rates remain high--about 30% a year for credit cards and only slightly less on other consumer loans. Some experts would prefer to see more money going into modernizing the country’s antiquated factories; other Latin American nations are on stringent austerity diets, putting off consumption in order to build national wealth.

But the prospect of buying on time delights most Mexicans, who are accustomed to living in a pay-as-you-go society. Consumer credit has never been widely available in Mexico, and it became tighter still during the economic depression of the 1980s.

As recently as 1990, even corporations had trouble borrowing money here--because there was little to borrow. The government demanded that 90 centavos of every peso deposited in the banks, then owned by the state, be turned over to the federal treasury to finance the public deficit. Interest rates were 60% a month.

Now, with the federal budget in balance and the reserve requirement eliminated, the recently privatized banks are rediscovering consumer lending. Consumer credit accounted for 13% of bank lending last year, compared to 8% in 1988. That share is expected to increase further this year.

“The country’s general prospects for growth are beginning to be reflected in income levels,” said Daniel Leal, deputy director of consumer banking at Bancomer, Mexico’s second-largest bank, which accounts for 37% of the country’s credit card billings.

“People have more buying power, so they are more credit-worthy,” Leal said. “In response, we are creating loans that better reflect the kinds of goods being bought.”

During the last two years, Bancomer has introduced furniture loans, personal computer loans, an array of mortgages and auto loans with 36 different options, including variable interest rates and monthly payments.

“Credit is allowing people to improve their standard of living,” Leal said.

The availability of credit is making a major difference in the lives of people such as dentist Sergio Hernandez, 33, and his wife, Maritza, a 28-year-old English teacher. After four years of marriage and renting, they are putting the finishing touches on a new house in Hacienda El Rosario, an exclusive new development in this industrial town 250 miles northwest of Mexico City.

“We hardly sleep,” Maritza said. “It’s a lot of excitement, but also a lot of responsibility.”

“We had planned to buy land and eventually build,” Sergio added, joining her in the upstairs hallway that connects the bedrooms, where workmen are painting walls and laying tile. “But without credit, it is hard to buy your first home. About four months ago, we decided to buy a tract home because mortgages became available and we could avoid a lot of the problems of custom building.”

Without a union or employer to provide backing for a government-sponsored mortgage, young professionals and other self-employed Mexicans traditionally bought land and then built their first homes a little bit at a time, as they could afford it.

With the advent of commercial bank mortgages, the Hernandezes and people like them can now move into developments such as El Rosario, with a clubhouse and playground, where two-story houses sell for about $57,000.

Home buyers make a 10% deposit when construction begins and additional payments during the construction period, accumulating the 20% down payment by the time they move in. Bancomer provides a 15-year mortgage for the remaining 80%.

A similar system is allowing Lourdes Blumenkron, a 24-year-old housewife, and her husband, Jaime Martin Sanchez, a 27-year-old merchant, to buy a $32,000 townhouse in another part of town.

“We made the decision to buy a house long ago, but the problem was the money,” she said. They first tried to buy a home when their son, Jaime, now 5, was born, but the deal turned out to be a fraud. They got their money back, but the disappointment stung.

Lately, they have been renting a house in a neighborhood of young professionals that they believe is a good place to raise Jaime and year-old Diego. They were delighted to find that a new development is planned for the same neighborhood and that bank credit is available for mortgages.

“Access to credit was decisive for us,” she said. “Otherwise, who knows when we could have owned a home?”

Houses are not all that Mexicans can now buy on time.

When Margarita Cuellar de Campos decided to buy a new car 19 months ago, she did what Mexicans without the full cash price have done for decades: She entered the Volkswagen lottery.

The 65-year-old Mexico City accountant began making payments on a Jetta--even though she did not get delivery of a car--in a kind of layaway plan called “Autofinancing.” The payments eventually cover the cost of a new car--but more important, they represent a chance in a raffle. The prize is a dealer loan for the difference between the accumulated payments--which earn no interest--and the price of a new car.

Every month, Cuellar de Campos joined other eager prospective buyers at the dealership, hoping her number would be selected and that she would drive away in a new car. And every month, her spirits sank a little lower as she walked home.

“A year passed and I won nothing,” she said.

In August, she asked Volkswagen for her money back, accepting a penalty, and took the cash down the street to a Ford dealer. Combined with other savings, the money became her $6,667 down payment on a more luxurious Ford Ghia, financed by Bancomer.

Cuellar de Campos is paying 25% annual interest on a $12,000, three-year loan. But she is just happy to have an automobile.

“The day I went down to the dealership, I drove away with the car,” she said. “Besides, I like this car better.”

Bancomer’s Leal said car loans have been a boon to auto makers, who also offer their own financing. “At first they thought we would compete with them,” he said. “Instead, they see they are selling more cars.”

A record 632,936 cars and trucks were sold in Mexico last year, 16% more than 1990. “The main reason for the increase was the financing plans that currently are available,” according to a report by the Mexican Automobile Industry Assn.

Meanwhile, major banks are aggressively promoting credit cards, going after new customers and routinely raising credit limits for existing customers twice a year, in time for Christmas and summer vacations.

Mexico is already Latin America’s top credit card market, accounting for two-thirds of Visa International’s billings in the region, said Eduardo Coarasa, area manager for Visa’s Mexico office, which opened in January.

“Mexican banks have known how to promote this product,” he said. And under private owners, promotion has become even more intense.

Bank cards are Mexico’s most readily available form of consumer credit. About 5 million Visa and Mastercards--one for every 16 people--have been issued here, and the number is growing at the rate of 100,000 a month.

The proportion still remains small compared to the United States, where Visa alone has issued one card for about every two people. However, Mexico is closing the gap as credit cards become more common in working-class neighborhoods, such as Ciudad Nezahualcoyotl, the Mexico City suburb where Estela Montoya lives.

Montoya, 56, received her first credit card a year ago, when a representative from Banco Nacional de Mexico, or Banamex, Mexico’s largest bank, passed out loan applications at the vocational school where she teaches knitting.

“I was short on money then, so it was as if the credit card fell from heaven,” she recalled. The $167 limit did not allow her to buy much, but it was enough for groceries at the supermarket, shoes when they were on sale, or a gift in time for a wedding--even when payday was far off.

“At that time, it really helped me,” Montoya said. “But now, I am trying not to use it. A credit card is an illusion--the ability to buy when you don’t have money in your pocket.”

Bancomer will extend credit to people making as little as $72 a week--three times the minimum wage--depending on their credit history and assets. “Having a credit card, being credit-worthy, gives people a feeling of pride,” Leal explained.

Credit availability is also creating opportunities for businesses.

Both the Hernandez and Sanchez families are buying homes built by the real estate division of the Arva Group, developer Valenzuela’s family firm. “Credit is the key to selling,” he said. “If there are no mortgages, people cannot buy houses.”

Valenzuela sees further opportunities in the government’s decision to withdraw from low-income housing construction. Now, the government housing fund will award contracts to private contractors and provide loans that will allow workers to buy the houses they choose, based on money placed in their private accounts from a 5% payroll tax.

“When people can choose, they will insist on more attractive, more functional houses,” he predicted.

Other businesses--from furniture stores to car rental agencies--are riding the coattails of the consumer credit boom.

The upscale furniture store chain Hermanos Vazquez sell its merchandise on credit to Bancomer cardholders. The program provides a separate credit line, with a lower interest rate than a bank card, based on the customer’s credit history with Bancomer.

In January, Rente, Budget Rent-a-Car’s Mexican representative, began offering its own credit card through Bancomer. It represents the beginning of what Rente executives see as a private-label credit card, complete with discounts, that will encourage customer loyalty.

Still, Estela Montoya is hardly the only Mexican who sees a downside in the availability of credit.

High interest rates make paying off loans difficult, leaving many consumers barely able to keep up with the interest when they make their payments. Developers and bankers agree that foreclosure rates on home mortgages are minimal, but making the monthly payment is often a struggle for homeowners.

Indeed, because mortgage payments remain fixed while interest rates are adjusted, home buyers can expect a ballon payment at the end of their mortgages--especially if interest rates remain near their current 30% annual level.

Under the old government-sponsored system, those fortunate enough to get a mortgage could count on that final balloon payment being forgiven. Commercial banks are expected to be less lenient. In the future, the best home buyers can expect is refinancing.

In addition, mortgage interest is not deductible from income taxes in Mexico, so there is no tax benefit.

Economists, meanwhile, worry about how the new focus on consumption will affect the economy in general.

“You have to wonder whether this is the best use of credit,” said Rogelio Ramirez de la O, president of Ecanal, a Mexico City economic analysis company. “It is easy to make a consumer loan, because there is a house or a car to serve as security. Banks can just turn out those kinds of loans.

“Business loans require more analysis, but in the long run, they are better for the economy,” he said. “Will banks just take the easy way out?”

There are also concerns about whether a society that has suffered a decade-long depression, complete with pent-up consumer demand, can wisely manage a credit boom.

“I fell for their trick,” disc jockey Jorge Zuniga complained bitterly. “At Christmas, Banamex offered a promotion, inviting cardholders to make unlimited use of the card and assuring us they would charge us no interest until February. I took advantage of the offer and charged far more than usual.”

His January bill arrived, as promised, with no required minimum payment and no date for payment. But in February, he was hit with the bill, which included a $61 interest charge.

“Easy Monthly Payments” director Julian Pastor also worries that credit will fuel consumerism, leaving many Mexicans in the same situation as the characters in his film. Jose and Veronica Diaz wind up so deeply in debt that they can’t pay their bill at the maternity hospital.

The Diazes have to cook up an elaborate scheme to persuade the hospital director to let them settle up their bill--in easy monthly payments.