What's Behind Rising Auto Sales? Cheap Financing
Want 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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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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