It’s official: prospective automobile buyers aren’t likely to be able to find 0% financing deals anymore.
Rising interest rates have caused auto lenders to pull back on the offers that have been the driving force behind the auto industry for the better part of the last decade, the WSJ reports. Until recently, still fueled by big incentives, the industry hadn’t seen too many meaningful aftershocks of rising interest rates. That's about to change in a big way (see "Car Sales Tumble As Automakers Slash Discounts For The First Time In 5 Years").
Lending companies have to pay the difference between the rate they offer customers and the Federal Funds Rate - as a result, 0% rates simply aren't a sensible financial option for captive financing companies, or banks, any longer. While some car companies are switching to different types of incentives, like discounted lease rates and rebates, even those are starting to slow.
Speaking to the WSJ, Adam Lee, chairman of Maine dealership chain Lee Auto Malls, said that "for a long time, everything was 0%. At first, buyers could find 0% finance deals on 48-month car loans, and then auto lenders started extending those deals to 60-month loans and eventually 72-month loans. There are fewer and fewer of those deals now."
The report noted that in September, the percentage of new cars that were financed with an interest rate of 1% or under was down to 5.3%, down from 8.2% a year prior and 11.7% two years ago. 0% loans made up for 3.4% of new car financings versus 9.1% two years ago.
In addition, the average final financing rate for a new car purchase was 5.75% over the last quarter, which is up from an average of 4.82% two years ago, at a time when the industry was at its strongest. Jack Hollis, general manager of Toyota North America, stated:
“You’re definitely seeing the entire industry pulling back. Obviously, interest rates rising is a reality in the marketplace, and we’re going to react.”
Low rates were a major catalyst in helping the automobile industry run hard for almost an entire decade, all the way back to the financial crisis in 2008. The rise in rates means that the average monthly payment for new vehicles will continue to rise, as it has been, according to data provided by Experian.
Despite this, General Motors still offers no interest loans on a couple of select models, like the Chevy Trax and the Chevy Equinox (suggesting that demand for these cars is less than stellar). An executive from General Motors told the Journal that even though these promotions are more expensive to maintain, they’re not going to "drop them from their quiver" altogether. The company is simply going to become more selective on which models qualify for low rates, GM spokesman Jim Cain said.
Adam Lee concluded that "The higher payments are making it harder for people to afford a new car. Some are going to used [vehicles], some are holding off [on purchases], and some are going to leases."
These rate hikes couldn't come at a worse time: at the start of the month, we reported that automobile sales in the United States for the month of September were nothing short of awful. Results from Ford, Honda, Nissan, Toyota and Fiat all tell the story of an industry grinding to a halt, with few silver linings. Three of these names posted double digit percentage declines in YOY sales and three of them missed analyst estimates.
Here are the additional lowlights from across the industry:
With incentives and low rates now both fading out fast, the automobile industry could be in for a grim finish to 2018 and an even worse 2019. Perhaps the only question left at that point will be how long it'll take the government to bail it all back out.