AUTO SALES Zero-percent loans mean less dealing for wheels at banks

Just 17 of every 100 buyers are accepting the automakers' loan offers.
DALLAS MORNING NEWS
What can be lower than zero percent on an auto loan?
Nothing.
And that's troubling banks and credit unions as they attempt to fend off fierce competition from the finance arms of Ford Motor Co., General Motors Corp. and other automakers.
Since the Sept. 11 attacks, car companies have unleashed one incentive after another, from zero-percent loans to $3,500 cash rebates. The deals have galvanized the auto market but have left banks and credit unions scrambling for customers.
In the last year and a half, banks and credit unions together have lost more than 3 percent in market share to the automakers' finance arms -- or "captive finance companies," as the industry calls them.
"You can't compete with zero percent," said David Hollodick, senior vice president at Bank of America. "The captive finance arms are being subsidized by their parent companies. Nobody is subsidizing Bank of America."
Competing goals
The friction stems from the carmakers' and the financial institutions' differing goals.
The primary aim of auto companies is to keep their factories running and the cars moving off the lot. So their subsidiaries will finance a loan even if they don't make money on the loan itself.
Banks and credit unions, however, are in the business of making money on auto loans. And zero percent makes no sense to them.
Banks have dropped car-loan rates on average to a 7.5 percent annual percentage rate, and they are going after customers whose credit history does not qualify them for zero-percent financing or who want the cash rebates.
"We are looking for that customer who goes for the dealer cash," said Bill Jensen, senior vice president at Bank One.
Only 17 out of every 100 consumers take the no-interest loans, said Art Spinella, president of CNW Marketing/Research, which specializes in the auto industry.
What deal's best?
Banks and credit unions are also pushing the message that no-interest loans may not be the best deal.
The two groups have launched a "Take the Rebate and Run" campaign that argues that consumers' monthly payments might be lower if they take the cash and get a low-interest loan from a bank or the credit union.
Many banks and credit unions also are stepping up the incentives they offer to car dealers in return for their cooperation in promoting bank loans at the point of sale.
Dallas-area credit unions, for their part, are consolidating their position in the market by mass-mailing pre-approved auto loan letters to customers and offering deals like "no payment for 90 days."
"Financial institutions are the most aggressive that I've ever seen in the last 50 years," said Carl Sewell, chairman of Dallas-based Sewell Automotive Cos.
Sewell, who specializes in luxury brands such as Lexus and Cadillac, works with up to 10 finance firms as well as running his own.
"They compete on the rate, the amount they will finance and the terms," he said.
Customers' advantage
All this is creating the best car-buying environment for consumers in decades.
"The rates are easily the lowest for new cars since 1987," said Greg McBride, senior financial analyst at Bankrate.com, which tracks consumer interest rates.
And car companies "control both ends of the market -- the pricing of the auto and the financing," McBride said.
They can tweak the price of the car or the financing terms to retain a customer and make a profit.
Banks and credit unions don't have that luxury, but they can borrow at lower interest rates from the Fed, unlike the captive finance companies.
Credit unions also have additional advantages. They don't have to pay federal income taxes, their operating costs are lower than commercial banks, and they are not-for-profit entities that can pass on some of their savings to consumers.
Making deals
Some banks and credit unions are striking deals with the smaller auto manufacturers and acting as their exclusive lenders. American Isuzu Motors Inc. and American Suzuki Motor Corp., for example, are both offering zero-percent deals through an exclusive arrangement with Bank One.
The consumer gets the car loan through Bank One at zero percent. Bank One collects the interest rate from the carmaker. And the auto manufacturer bites the cost of the no-interest transaction.
"The whole zero-zero phenomenon is going to be around for a while," said Jensen of Bank One. "We wanted to make ourselves available for that strategy."