Money Matters

Why Zero-Percent Car Loans Are Going Away

How The Decline Of These Popular Auto Finance Incentives Could Affect Your Car Payments

BY Andy StonehouseMay 7, 2019

For much of the past decade, TV commercials for new vehicles have attempted to woo consumers with the auto finance industry’s answer to the brass ring: zero-percent financing.

But while there’s a bit more to these deals than these ads may have you believe, the bigger news is that they’re slowly going away—the victim of rising interest rates and new mobility models that don’t rely on financing at all.

So should you be concerned about the potential demise of these offers? That depends—on your credit score, your car situation, and whether you like your TV ads served with a healthy dose of financial disclaimers.

Are Zero-Percent Deals Really A Thing?

One reason you may not actually miss zero-percent car deals is that they’re simply not available to everyone.

As you’ll find when you read the fine print, zero-percent financing is strictly the domain of people with squeaky-clean credit scores. Typically, the offers only apply to those with FICO scores of 720 or higher, a financial benchmark that readily excludes almost 45 percent of the U.S. population.

At the very height of the recent American automotive boom, the deals were designed as an additional incentive to get “qualified buyers” into showrooms and get them so giddy on the great interest rate they’re getting so as not to balk at the sticker price of the kinds of high-value trucks and SUVs that are increasingly driving the auto industry.

Admittedly, if you’re able to qualify for one, the savings on a zero-percent loan is not insignificant. With the average price of a new car at an all-time high of $36,000, even a few interest points can add up to thousands of dollars over the life of an automobile loan.

However, these deals—and their endless promotion—have begun to fade as they fall victim to that familiar one-two punch of shifting economic conditions and changing consumer preferences.

“Zero percent in most cases was never designed to be a great option for the consumer. It’s almost entirely to drive foot traffic,” Brad Korner, general manager of Cox Automotive Rates and Incentives, told Autotrader.com. “In a lot of situations, typically the majority, the standard (finance) rate along with the (cash off) incentive is a better deal.”

They Might Not Be The Best Deal Anyway

More than just the exclusivity of the required credit score, the zero-percent deals aren’t necessarily the cheapest solution for automotive customers. In most cases, customers had to make the choice between zero-percent interest and attractive cash rebates—and could only pick one or the other. As Korner says, those factory rebates alone can often lead to lower overall payments.

No-interest financing frequently requires a shorter loan period than the new, sometimes unbelievably long payment periods, meaning that buyers often end up paying more than they anticipated per month.

The financing also only applies to certain models on the dealer’s lot—not that option-heavy model you’d like to custom-order. Also, many customers may find that dealers are unwilling to haggle on price if the zero-percent option is considered as they’ve already been considered to have gotten a pretty cherry deal.

Zero-Percent Deals On The Back Burner

Among the reasons zero-percent auto finance deals are finding themselves creeping toward the car industry’s endangered list is the reality of lenders trying to cope with higher national interest rates.

Interest rates in America have been at rock bottom since the financial meltdown of 2008, creating a ripe environment for low- or no-interest loans. But rates began creeping upward in 2015, and 2018 alone saw four rate increases by the Federal Reserve. In short, our booming economy no longer needs the safety blanket of low rates—which makes it harder for auto lenders to offer them.

According to industry researcher J.D. Power, carmakers have responded by shelving the no-interest loans and cutting back other incentives.

“Reduced spending for the industry is partially a reflection of the reduced availability of low-APR offers as interest rates rise,” said Thomas King, Senior Vice President of J.D. Power’s Data and Analytics Division.

In September of 2018, King said only 5.3 percent of vehicle sales were completed with a low- or no-interest APR, versus 8.2 percent of sales in 2017. And zero-percent interest rate sales are even lower, making up just 3.4 percent of sales while accounting for almost 10 percent of sales back in 2016, a record year for U.S. car sales.

Edgar Reyes, finance manager at Shabana Motors in Houston, said dealerships like his simply can’t afford to give away virtually free money anymore, as they had been doing to push sales in the post-recession environment.

“In the long term, car manufacturers will likely have to cut production instead of continuing to sell cars at massively discounted prices,” he said.

Changes In The Buying Mindset

In addition to the financing challenges, a source at one of the Big Three American automakers said public interest in the zero-percent financing option itself has begun to fade.

With record low unemployment and a thriving economy, buyers have a wide range of new options when it comes to automobile ownership, including lease payments that are lower than auto loan payments. Many companies have also begun to focus on moving their pre-owned inventory, with attractive and value-loaded offers on certified pre-owned vehicles.

Consumers themselves have also begun to figure out that being locked into a five- or six- year auto loan for a consumer product that instantly loses as much as a quarter of its value due to depreciation often doesn’t make sense for a modern life built on flexibility.

As a result of this consumer reality, other all-new approaches to mobility are competing with tradtional auto finance, including ride-sharing, car-sharing and subscription-style services that offer increased flexibility without the long-term commitment and debt requirements of an auto loan.

“I think the traditional car ‘deal’ is disappearing,” said Will Craig, managing director of LeaseFetcher, a British car cost comparison site. “These days, most people just don’t have the disposable income to risk the depreciation that comes with physically owning a car, and potentially losing a lot of money.”

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