Zero Percent Auto Loans Are Quickly Becoming Extinct, Thanks to Rising Interest Rates

Zero percent auto loans are rapidly becoming a thing of the past.

Auto dealerships and automakers used such sweetheart loans to entice consumers to look around the showroom.

Now, however, car dealers are abandoning these incentives, in response due to steadily rising interest rates.

Online vehicle information analyst Edmunds estimates that only 7.4% of all promoted auto sales offered zero percent loan financing in March 2018.

That’s about 11% lower than in 2017. And those 7.4% of auto dealers still offering zero percent loans is the lowest it has been in more than two years.

Jim Lentz, the chief executive officer of Toyota Motor Corp.’s North American operations, said automakers and dealerships are abolishing the cheap lending offer.

Yet, according to Lentz, no dealer wants to be first to drop the incentive, either.

“Nobody wants to be the first one to go from zero to 0.9 percent, or from 0.9 percent to 1.9 percent, but you’re going to see zero no longer be the norm,” said Lentz.

Lentz said that the need to eradicate zero percent financing deals for consumers means that smaller auto merchants will suffer more than others.

“That has to be pushed along. That will impact, marginally, some people getting pushed out of the market,” Lentz said.

Henio Arcangeli Jr., a Honda Motor Company U.S. sales executive, concurred that declining zero percent financing deals will undoubtedly hurt smaller businesses.

“The companies that are at zero percent, our sense is they’re going to start going from zero to 0.9,” said Arcangeli Jr.

The main factor driving the extinction of zero percent financing is quickly rising interest rates, he said.

Rising rates

Steadily rising interest rates mean that automakers and dealerships must deal with their own rising borrowing costs.

To date, the Federal Reserve has greenlit an increase in interest rates for the sixth time since March 2018.

The Federal Reserve has increased the interest rate in steady increments since December 2015.

As of this writing, the Federal Reserve benchmark rate is 1.75%. The Fed may increase that to 3% by 2020.

A rising interest rate is not all bad news. Savers and bond holders will welcome higher payouts after 10 years of virtually zero interest.

The Fed also wants to avoid inflation, so an increase in the interest rate is a timely and effective means of cooling off the economy in advance.

Yet, it could slow auto sales. “It’s hard to support zero financing in this type of environment. It’s very expensive,” said Arcangeli Jr.

Automakers and dealerships now resort to other promotional methods to lure in consumers in an ever-shrinking market. Cash incentives and discount lease payments will increasingly replace zero percent financing deals.

Still, auto consumers are more affected by interest rate hikes than the auto business.

The interest rate on loans for new cars averaged 5.7% for consumers in March 2018. That rate was highest since 2009.

To date, Americans owe more than $1.1 trillion dollars in car loan debt.