Dealers Changing Terms On New Car Financing

With interest rates rising, auto lenders are reigning in their 0 percent financing deals that have become the norm over the past few years.

According to a report in The Wall Street Journal (WSJ), while cheap financing breathed new life into the auto industry in the U.S., with interest rates rising it is becoming too costly for the auto lenders. And with sales slowing, car companies are choosing other types of sale incentives including cash rebates and discount lease rates to entice buyers into the showrooms. “For a long time, everything was 0%,” said Adam Lee, chairman of Lee Auto Malls, a dealership chain in Maine, in the WSJ report.  “There are fewer and fewer of those deals now.”

According to the WSJ, in September the percentage of new cars that were financed at an interest rate of 1 percent or less declined to 5.3 percent, which marks an 8.2 percent decline from September of last year and down 11.7 percent from September of 2016. That was the year auto sales in the U.S. peaked, reported the WSJ, citing data from market research firm J.D. Power.  

No-interest loans only accounted for 3.4 percent of all new car financing in September, which the paper noted is down from 9.1 percent two years earlier. The financing rates on new car loans have also been inching higher, but do remain a lot lower than the levels of 2008. The average rate to finance a new car was 5.75 percent in the second quarter. Two years earlier it was 4.82 percent.

“You’re definitely seeing the entire industry pulling back,” said Jack Hollis, general manager of Toyota North America, of the scaling back of interest-free auto loans. “Obviously, interest rates rising is a reality in the marketplace, and we’re going to react.”  That could have a negative impact on buyers. For years after the Great Recession, it was the zero percent financing that drove buyers into the showroom, noted the paper.