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Rising Interest Rates Put Brakes on No-Interest Auto Loans
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Strategies such as generous incentives and easy terms on loans have been widely adopted by automakers to lure customers. A trend of offering auto loans with zero annual percentage rate (“APR”) of interest has also been in vogue in the automotive sector. These zero percent APR loans have been particularly offered by dealers at times of vehicle clearance and holiday season. Sometimes, zero percent financing option is offered for models that are not selling well as a form of car-buying incentive to speed up sales.
Customers look out for these opportunities to purchase their dream cars at comparatively lesser costs. In order to obtain this loan, consumers need to possess a good credit score to purchase vehicles without bothering about additional costs of borrowing money. Shoppers, who obtain zero percent financing on auto loan of $25,000 for five years, would save $3,300 in interest charges in comparison with loans with 5% APR.
However, in today’s landscape, with rising rate of interest, purchasing an automobile through car financing has become more expensive. Per Associated Press, Edmunds’ analysts quoted that in August 2017, 14.6% car deals included zero APR financing while this dropped to 7.4% in 2018.
Carmakers Squeezing No-Interest Offers
Lately, automakers have been cutting down on no-interest car financing options. In this rising interest rate scenario, two Japanese auto giants — Toyota Motor Corporation (TM - Free Report) and Nissan Motor Co. (NSANY - Free Report) — are lowering zero percent loan offerings. In August 2017, no interest loans accounted for 21% of total sales of Toyota while it declined to 4.6% in August 2018. For Nissan, these rates were 4.8% and 13% in August 2018 and August 2017, respectively. Again, for Fiat Chrysler Automobiles N.V. , sales backed by no-interest auto loans accounted for less than 0.5% of total sales in August 2018, whereas this accounted for 13% in August 2017.
Rising rate of interest can be attributed to this trend as in case of high interest rate, the opportunity cost of offering a no-interest loan is much higher. Depleting car inventory is also responsible for the waning trend of no-interest loans. At present, the inventory level is at its lowest since 2016 and quite naturally automakers do not have the sense of urgency to clear inventory by offering pricey incentives.
In Conclusion
Presently, it is a tough call for automakers to decide whether to raise sales by offering incentives or to maintain their profit margin. Competition among automakers, macroeconomic environment, financial strength, marketing strategy and others will determine the extent of incentives offered by automakers.
Among the stocks discussed above, Toyota and Nissan currently carry a Zacks Rank #2 (Buy) while Chrysler has a Zacks Rank #3 (Hold).
Nissan, Toyota and Chrysler have expected long-term growth rate of 4.3%, 6% and 25.3%, respectively.
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Rising Interest Rates Put Brakes on No-Interest Auto Loans
Strategies such as generous incentives and easy terms on loans have been widely adopted by automakers to lure customers. A trend of offering auto loans with zero annual percentage rate (“APR”) of interest has also been in vogue in the automotive sector. These zero percent APR loans have been particularly offered by dealers at times of vehicle clearance and holiday season. Sometimes, zero percent financing option is offered for models that are not selling well as a form of car-buying incentive to speed up sales.
Customers look out for these opportunities to purchase their dream cars at comparatively lesser costs. In order to obtain this loan, consumers need to possess a good credit score to purchase vehicles without bothering about additional costs of borrowing money. Shoppers, who obtain zero percent financing on auto loan of $25,000 for five years, would save $3,300 in interest charges in comparison with loans with 5% APR.
However, in today’s landscape, with rising rate of interest, purchasing an automobile through car financing has become more expensive. Per Associated Press, Edmunds’ analysts quoted that in August 2017, 14.6% car deals included zero APR financing while this dropped to 7.4% in 2018.
Carmakers Squeezing No-Interest Offers
Lately, automakers have been cutting down on no-interest car financing options. In this rising interest rate scenario, two Japanese auto giants — Toyota Motor Corporation (TM - Free Report) and Nissan Motor Co. (NSANY - Free Report) — are lowering zero percent loan offerings. In August 2017, no interest loans accounted for 21% of total sales of Toyota while it declined to 4.6% in August 2018. For Nissan, these rates were 4.8% and 13% in August 2018 and August 2017, respectively. Again, for Fiat Chrysler Automobiles N.V. , sales backed by no-interest auto loans accounted for less than 0.5% of total sales in August 2018, whereas this accounted for 13% in August 2017.
Rising rate of interest can be attributed to this trend as in case of high interest rate, the opportunity cost of offering a no-interest loan is much higher. Depleting car inventory is also responsible for the waning trend of no-interest loans. At present, the inventory level is at its lowest since 2016 and quite naturally automakers do not have the sense of urgency to clear inventory by offering pricey incentives.
In Conclusion
Presently, it is a tough call for automakers to decide whether to raise sales by offering incentives or to maintain their profit margin. Competition among automakers, macroeconomic environment, financial strength, marketing strategy and others will determine the extent of incentives offered by automakers.
Among the stocks discussed above, Toyota and Nissan currently carry a Zacks Rank #2 (Buy) while Chrysler has a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nissan, Toyota and Chrysler have expected long-term growth rate of 4.3%, 6% and 25.3%, respectively.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>