How to Pay for that New Ride!

phoenix22 · Posted: Sun Nov 03, 2002 10:04 am Post subject: How to Pay for that New Ride!

Business News
Sunday, Nov. 3, 2002
Detroit Takes a Risk for Sales

DETROIT (Reuters) - As cash rebates and interest-free loans
for new vehicles show signs of losing their allure to nervous
American consumers, automakers are starting to offer six-year
loans, instead of the usual five, to lure buyers into car
showrooms.
In the latest escalation of Detroit's price battles, Ford
Motor Co. earlier this month quietly began offering 72-month
loans with interest rates ranging from 1.9 percent to 6.9
percent on most of its 2003 Ford-brand lineup. Automakers
usually discount loans only up to five years, and analysts said
Ford's move marks the first time a U.S. automaker has offered
such a deal on a longer loan.
Banks and other lenders have offered six-year auto loans
for some time to borrowers with poorer credit. General Motors
Corp. and DaimlerChrysler AG's Chrysler arm have traditionally
offered a few six-year loans, usually for vehicles such as
commercial trucks and vans.
But Chrysler spokesman James Ryan said the number of
six-year loans Chrysler approved had doubled since 2000 and now
accounted for about 20 percent of all its vehicle loans.
The moves come as Detroit faces a slowdown in U.S. sales
and diminishing returns from other incentives. Analysts said
the plan shows automakers are willing to take risks on buyers
with lower credit ratings who need longer-term loans to keep
sales up.
Ford's 72-month offer "totally blew me away," said Art
Spinella, a vice president at auto industry analysis firm CNW
Marketing Research. Automakers "have already been loosening
credit to get as many people as possible into cars, starting
with leasing back in the mid-'90s, and they've started to
loosen credit ratings again, because they have to cast as big a
net as possible."
Ford spokesman Jim Cain said the automaker made the offers
"so we would have a product for every purse and purpose."
"The option exists because there's a consumer demand for
it," Cain said. "It's clearly designed to reduce monthly
payment levels."
RISKIER BUSINESS
Automakers keep a tight watch on their customers' credit to
minimize losses and to ensure they can sell the loans they make
on the debt markets. While retailer Sears, Roebuck & Co. had
7.2 percent of its credit-card accounts delinquent by 90 days
or more in the third quarter, Ford's 60-day delinquency rate
was 0.7 percent.
Detroit's customers began to show some strain in their
finances during the third quarter, as automakers reported a
rise in the number of bad and delinquent loans, driven in part
by bankruptcies and a sluggish U.S. economy.
But automakers also said their offers of interest-free
loans were actually drawing in a richer class of buyers. Unlike
zero percent credit cards or other come-ons, automakers tend to
give their interest-free loans only to customers with the best
credit, and buyers with worse credit typically choose cash
rebates anyway to lower their monthly payments.
Ford Credit officials said earlier this month that roughly
12 percent of the loans they made on Ford vehicles in the third
quarter were interest-free. As a result, the share of
higher-risk buyers getting loans had fallen to 4 percent in the
third quarter, below the target of 8 percent to 9 percent and
well off the 12 percent Ford had in 1998 and 1999.
"My comment has always been you don't need to look for
subprime" credit customers, Ford Chief Financial Officer Allan
Gilmour said last week. "You get enough in the normal course of
business."
Spinella said with richer buyers already tapped, automakers
would likely have to turn to lower-income customers who had
been either not shopping for new vehicles or looking at used
cars and trucks, prices of which have been falling rapidly.
He said some automakers, notably Japan's Mitsubishi Motors
Corp., had been able to boost sales with lower-credit buyers
and keep their credit costs in line. Mitsubishi Motors is 34
percent owned by German-American automaker DaimlerChrysler.
"Mitsubishi's delinquency numbers are a little higher than
industry average but not by much," Spinella said. "It can work,
and I would be surprised if other automakers didn't do it."

Rolling Eyes


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