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0% financing seen declining as interest rates rise

August 10, 2018
Financing deals in July with zero percent interest were at their lowest levels since 2005 and are down 439 basis points year over year, according to a new report from Edmunds.
Zero percent financing deals accounted for 6.95 percent of sales in July, down from 11.34 percent in July 2017. The summer typically is when these deals see an uptick, as manufacturers attempt to push out inventory and increase sales, according to Edmunds. However, with interest rates rising and the Federal Reserve planning for more two more hikes before yearend, zero percent financing is becoming more expensive for automakers.
"A lot of it really is contingent on the rising interest rates that we are seeing throughout the market," Jeremy Acevedo, Edmunds’ manager of industry analysis, told Auto Finance News. "As the APR rises for new vehicles, it becomes a more expensive endeavor for automakers to roll out the 0% financing deals."
Sometimes when a customer is buying a car, they will have a 0% financing option. This means that they don’t pay any interest on the loan and the consumer is essentially paying the same amount as a cash buyer but spreading payments over a longer term. In this way, automakers are making money on the car rather than the financing deal.
Despite the decline, Acevedo does not see it becoming a trend month over month.
"I think that we might see a little more toward the end of the year, but I don’t think it’ll be those rates that we saw in 2017, especially not close to 2016 or the years before that," Acevedo said. "As the year goes on, automakers are going to need to liquidate to their outgoing model year inventory. Otherwise, it is going to become very expensive for them to move them if they have a bunch of 2018 lots when December rolls around."
The average annual percentage rate for new vehicles in July was 5.74 percent, up from 4.77 percent during the same month last year. Used car interest rates were also up, increasing to 8.31 percent from 7.46 percent at the same time the year prior.