What's Behind Rising Auto Sales? Cheap Financing

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Auto salesWant a cheap car loan? How does free sound?

Believe it or not, more and more car buyers are being offered 0% interest loans, many with terms as long as 60 months.

Thanks to record-low interest rates, the financing arms of automakers like Toyota (TM) and Ford (F) are able to offer 0% financing to some buyers of selected models, and cheap financing to almost everyone else -- even to folks with less-than-perfect credit.

A not-so-surprising result: Auto sales in the U.S. have been on the rise.

So-So Economy Not Stopping Car Buyers

While auto sales still haven't quite recovered to the levels that were routine before the 2008 economic crisis, new car and truck sales have continued to rise, despite an economy that's still just so-so.

Through August, U.S. sales of "light vehicles" -- cars, SUVs, and pickups -- were up 19.9% over last year. Some automakers have seen even bigger gains: Volkswagen's (VLKAY) sales were up almost 37%, Chrysler's almost 26%.

In fact, the pace of new-vehicle sales is at its highest level since the U.S. government's "Cash for Clunkers" program drove a sharp (but temporary) rise in the summer of 2009.

What's driving those fat gains? Overall slow-but-sure improvements in the economy have surely helped, but cheap -- and easier -- financing has made a big difference.

Easy Credit

It's getting somewhat easier to get loans of all kinds, but the availability of auto loans is improving faster than in some other categories of financing, like mortgages. That's because auto loans tend to have a lower default rate: People who depend on their cars to get to work make an extra effort to stay current on payments.

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Most of the major automakers own financing companies. And those "captive financing" operations have made low-cost loans a staple of many car companies' "incentive" offerings. Incentives, which include both cheap-financing and the "cash back" deals often advertised on TV, are typically used by car manufacturers to boost sales of slower-moving models or adjust a new model's pricing relative to its competitors.

On top of offering low-cost loans, those financing operations are often more willing than your local bank to lend to folks with less-than-perfect credit.

Sales of new vehicles to buyers with "Tier B" credit, the industry's term for those with credit scores between 650 and 679, have risen 26% this year, according to a Bloomberg report.

A Good Time to Take Advantage

Here's what it means for consumers: If you need a new car, and you're not planning on paying cash for it, the low cost of financing means that this is a good time to buy.

For instance, on a $25,000 60-month loan, the difference between a 4.5% interest rate and no interest at all is about $50 a month, or roughly $3,000 over the course of the loan.

Not all automakers are offering 0% financing, but more and more are: In addition to Toyota and Ford, Chrysler, General Motors (GM), and Nissan (NSANY) have had 0% offers on some models recently, according to Edmunds.

Of course, not everybody will qualify for 0% financing, and even the automakers that offer it are only making it available on selected models. But no matter what kind of car or truck you're buying, financing is cheaper -- and for most, easier to get -- than it has been in a long time.

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Gas Saving Tips: Practical to Extreme
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What's Behind Rising Auto Sales? Cheap Financing

One tip we see over and over again, but that isn’t immediately obvious, is to make your car as light as possible. This can be done by simply cleaning out your trunk and removing unused roof racks, or you can go for some more extreme measures. Last year, DailyFinance senior features writer Bruce Watson asked our readers for their gas saving tips. “Ray” said he pulled out all of his car’s seats (save the driver’s), ash trays, speakers, radio, sound deadening material, interior trim, and anything else he deemed “not integral to the vehicle’s driving ability.”

Driving less is another tried and true (and obvious) tip, but sometimes the methods of reducing your driving aren’t as apparent. One way to cut down on trips to the grocery store would be to plan out your meals for the week. You can also buy in bulk.

Also, it can help to combine several errands into one trip, rather than having to leave your house multiple times.

Oh, and take your bike or walk if you can. You can exercise and save money at the same time.

Plan your route beforehand with the goal of reducing idling, accelerating and breaking in mind. The longer you can drive at a constant speed, the better for your fuel economy. Also, slow down a bit. For every 5 mph over 60 mph that you travel, it costs you the equivalent of an extra 24 cents a gallon. Try to avoid left turns, and accelerate more gently. And, go to gas stations during off-peak hours to avoid waiting in line, which involves idling and wasting fuel.

Make sure your tires are inflated to the right pressure, make sure you have fresh oil, and replace any dirty air filters. All of those things can improve your car's fuel economy. A simple tuneup can save the equivalent of 16 cents a gallon. We’ve also heard from our readers that gas chips can help increase your fuel efficiency -- some say by up to 10%.

The technique of driving with the aim of getting the very best mileage out of your car -- using a slew of different methods -- is called "hypermiling."

For example: Hypermilers note the exact speed necessary to go over the crest of the hill, so that on the downhill they don’t have to waste gas braking. They will also time their trips to take advantage of strong tailwinds and avoid headwinds/crosswinds.

Another hyper-tip: Shop at stores located at higher elevations than your home. That way, when the car is weighed down by everything you buy, you'll be traveling downhill.

Drafting (following closely behind a large vehicle at highway speeds to reduce headwinds) is considered extremely dangerous, but hypermilers have found a somewhat safer version. During times with high crosswinds, driving in the lane next to a large truck can provide similar advantages to drafting from behind. (Check out this link for more extreme hypermiling tips.)

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At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.


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