Interest rates may be about to go up, but don’t expect interest-free car loans to go away, even though it will cost the Big Three millions to keep offering them, the Reuters news agency said.
0% financing, which has hooked consumers for almost three years and is credited by some analysts with keeping the economy afloat during the lacklustre US recovery, is a costly incentive, according to the report.
Automakers take a hit of $US3,000 to $4,000 per vehicle on average to offer 0% loans that have a five-year payback term, Paul Ballew, head of market and industry analysis at General Motors, told the news agency.
“It will cost the industry some money if (interest rates) run up a hundred basis points … it would certainly be in the millions of dollars,” Ballew reportedly said, adding 0% loans are likely to continue for the rest of the year. “It’s not as painful as people assume.”
Reuters said US Federal Reserve officials are expected to nudge overnight rates up from their current low of 1% – a low last seen in 1958 – when they meet on June 29 and June 30 as a first step in a protracted rate rise cycle.
Though GM reportedly played down the effect of a rise in short-term interest rates, analysts told the news agency the industry is considering other ideas – and a possible escalation of Detroit’s profit-eroding price war – to support new car and truck sales.
Prudential Equity Group analyst Michael Bruynesteyn said in a research note GM will try to reduce its dependence on the interest-free loans by introducing deals such as “flexible ownership,” where a buyer would get to use an SUV for one weekend a year with the purchase of a sedan, Reuters noted.
The report said low interest rates helped carmakers continue the cheap loan programme first unveiled by GM a week after the September 11, 2001, attacks in its “Keep America Rolling” campaign – Ford and Chrysler group quickly followed GM’s lead.
The news agency said costs will increase as rates rise, with an accompanying rise in carmakers’ borrowing costs putting a further damper on profit but analysts reportedly said the incentive programme and other offers are required to fuel sales.
“They are going to have to do whatever is necessary to drive the volume,” Mike Jackson, manager of North American vehicle forecast at CSM Worldwide, told Reuters.
Ford and the Chrysler group, which battle GM in the fiercely competitive new vehicle market, are likely to follow the lead of the world’s largest carmaker once again, the report said.
“They make the market and they probably will decide what to do with it,” Joe Eberhardt, Chrysler group’s executive vice president for global sales and marketing, told the news agency, which added that Detroit’s carmakers are also counting on the strengthening economy that typically accompanies an interest-rate rise to offset the higher costs of offering 0% loans.
They may also be able to raise prices, George Pipas, Ford’s chief sales analyst, told Reuters.
The report said already there are signs prices are on the rise – the average transaction price for a vehicle, despite discounts of nearly $5,200, rose to $23,843 in the first half of June, an increase of about 4% from the previous year, according to CNW Marketing Research.
But some analysts do not expect that trend to continue. Rising rates could dampen demand for vehicles and more incentives would be required to maintain an annual US sales rate of 16.5 million to 17 million, Bruynesteyn reportedly said.
Despite the increased expense, interest-free loans are likely to remain a significant marketing tool for the industry, Reuters said.
“You will see cash play a more prevalent role. You may see leasing play a more prevalent role,” Ballew reportedly said. “Or at times, it may be 0% because as interest rates go up, 0% may be more attractive to consumers.”