REAL DEAL AUTO BLOG

The Real Deal: Less Than Zero

Posted in Uncategorized by wolferadio11 on October 28, 2009

downey%20in%20less%20than%20zero%20560

John Clay Wolfe

Oct 2009

The car business literally ceased the day World Trade Center I and II fell back to the Earth. And so the savvy suits at GM created a landmark campaign “Keep America Rolling.” Generous Motors offered 0% interest for 60 months on EVERYTHING they made. Customers had to forfeit their rebates in exchange for 0% interest loans, but my god did it work. The sales rates were staggering.  I personally witnessed customers at a Texas Chevy house literally fighting to be next in line to sign papers. The rumor had gotten out that 0% was going to end suddenly; the customers in this particular store believed they were in a race to sign docs before the last 0% credit was used up. That was 2001. Today eight years later, zero percent is BACK on.

 

The zero percent come-on comes and goes like a rising tide. Much like the manufacturer rebate system, the no-interest rate deal has become a tool to control/stimulate the marketplace. Personally, I’m surprised it still has any effect at all. But it does. GM offered a 48 for 0% for 48 hours sale two seasons ago that made the fish float to the top like two army telephones in a stock pond. That 48-hour sale morphed into 72 for 72 hours, and then flopped around for another week before the 0% spigot was closed AGAIN.

Zero percent financing is not that great of a deal when one does the math. The mathematical rebates vs 0% calculation finds its mathematical median in the mid-$30,000 purchase price, with rebates flirting with the $4-5,000 mark. Translation. If the unit (vehicle) has a $4000 rebate and the net price is under $30k, take the rebate, not the free money. If the reciprocal is over $35k, it usually makes fiscal sense to go for the interest-free loan.

The much discussed Cash for Clunkers come-on was the retarded brother of 0%. Same as it ever was. Your tax money stimulated major moves in the sales VU meter, with the usual painful hangover. While the manufacturers bitch and moan about the “end of government incentives,” the hangover from zero percent in ‘01 and ‘02 was just as bad. This one seems worse because things always seem worse when you’re living them.

Moral of the story: if you artifically stimulate something—whether you do so with drugs, financing or plain old lies—there will always be a reckoning.

There is a difference, though. Consumer confidence is lower than a grasshopper’s knee, and there’s no sign that it will come back any time soon. Pain is slowly becoming panic for the brass hats and dealers. You won’t read about the panic in Automotive News or hear about it on the network news. But it’s there. I feel it, I smell it, I hear it in the factory conference calls, and running the grapevine with other dealers.

The industry is shaking, sweating, looking for a fix. This sounds crazy, but in a world where common sense seems not to apply, and we all just keep looking for that next sales high. And here it is: Reverse Interest.

You buy a new Caddy, Fiat, Ford, whatever, and the carmaker will pay you five percent a month interest to make payments on your new purchase.  They could do it, just beef the rebates up a bit (which they’re already running that way again) then offer reverse interest if you give up the rebate.

Obviously, this idea wouldn’t fix a damn thing. But it might get the car business through the winter. Either that or . . . what? At some point, the music will stop and there won’t be enough chairs for everyone. And then . . . the music will start again.

Also on www.thetruthaboutcars.com

5 Responses

Subscribe to comments with RSS.

  1. Russ said, on October 29, 2009 at 7:40 AM

    I try not to think about the days when the public got excited about things like 0%. To depressing.

    But oh those were the days weren’t they!

  2. wolferadio11 said, on October 29, 2009 at 2:20 PM

    dwford :
    October 29th, 2009 at 12:57 pm

    The problem with 0% is buyer’s remorse. Buyers will take the 0% and skip the rebate, then 2 years later want to trade, thus screwing themselves out of the original rebate money. I see it all the time.

    0% works great for people who keep their cars forever and have great credit, or those who are flipping some negative equity, which they are effectively refinancing at the 0%.
    ott :
    October 29th, 2009 at 1:04 pm

    Hmmm… Negative interest. Could I get that on my mortgage?
    geeber :
    October 29th, 2009 at 1:07 pm

    I truly believe that we are witnessing a major change in the automotive market. People were only able to afford $35,000+ vehicles by using home equity loans. If that source of income is gone, or greatly reduced, not only will people be buying less expensive vehicles, but they will also be buying them less often.

    Couple that trend with greatly improved reliablity and longevity for all vehicles, and it’s hard to see the industry rebounding to its former heights anytime soon.
    mfgreen40 :
    October 29th, 2009 at 1:50 pm

    Negative interest— whats happens if the company goes bankrupt?

  3. George wills said, on October 29, 2009 at 6:24 PM

    I really enjoy reading your spin on the car industry. Keep up the great work. Also, I listen every Saturday to the show. You have a huge fan in Dallas Texas

  4. Richard said, on October 30, 2009 at 4:20 AM

    Nice Post, I have bookmarked your site and will return again.
    Bad Credit Auto Loans

  5. wolferadio11 said, on October 30, 2009 at 12:40 PM

    chuckR :
    October 29th, 2009 at 2:15 pm

    Hmmm… Negative interest. Could I get that on my mortgage?

    Depends. Are you a reckless fool who took out an option ARM or liar loan (Alt A)? Did you then piddle away the proceeds on vacations, fine dining and expensive toys? If the answers are yes, Your Federal Government may be able to assist you.

    disclaimer – I’m sure ott can’t answer yes to these questions 😉
    threeer :
    October 29th, 2009 at 2:55 pm

    A few easy steps to vehicle ownership:

    1) Save cash
    2) Purchase vehicle with said cash (preferred 3-5 year old used)
    3) Keep car for 3-5 years
    4) Repeat steps 1-3

    No payments, no negative equity, no interest rates…
    segfault :
    October 29th, 2009 at 2:57 pm

    There’s more than one problem with 0%. One is the negative equity people rolled into the loans. Another is the fact that there is no incentive to make extra payments to try to eliminate or reduce said negative equity, especially if the consumer bought gap insurance. Even if the consumer didn’t roll negative equity into the loan, given the steep depreciation curve that afflicts the manufacturers who offered 0%, it’s likely they’ll be underwater after two years of principal payments, not only screwing themselves out of the original rebate, but out of the ability to trade the vehicle in, as well. And yet another problem, already mentioned, is that traditional financing is available at 3.99% (and you still get the rebate), which is a better deal for many people, especially those who will pay the loan off early.
    mtymsi :
    October 29th, 2009 at 3:59 pm

    Despite the pros and cons of zero percent financing as mentioned in the article zero percent does sell cars. IMO in this market anything that sells cars is a good thing. As far as rolling the negative equity and/or being in a negative equity position in two years there is nothing new or different about that. The same thing happens without zero percent financing day in day out. When I used to sell cars I always calculated which scenario was less expensive, zero/reduced rate financing or the rebate. I think most dealers do as one or the other does not effect their profit margin and believe it or not dealers don’t want to put consumers in a position that makes it more difficult or impossible to trade out of a vehicle if they can avoid it. It just makes it harder to sell the next vehicle. That’s also the reason dealers prefer to lease vehicles, they know there won’t be any negative equity at the end of the lease (except for excessive mileage and damage) and it puts the customer on a time frame to purchase another vehicle.
    FloorIt :
    October 29th, 2009 at 4:10 pm

    When I got my Fusion in March this year, with the 0% or $3500 cash back the monthly payments were within $2. I took the $3500 cash back because there would be less equity at any given time compared with 0%.
    dolorean23 :
    October 29th, 2009 at 4:29 pm

    I truly believe that we are witnessing a major change in the automotive market. People were only able to afford $35,000+ vehicles by using home equity loans. If that source of income is gone, or greatly reduced, not only will people be buying less expensive vehicles, but they will also be buying them less often.

    re: geeber +10 my friend. You’ve hit right in the nose. Now who is going to benefit from having a good car line under the 35K mark?? History of the last 20 years would show that Honda and Toyota stand to gain the most with a close second now by the Korean conglomerate. Ford may be able to maintain parity with the resurgance of the Fiesta, bringing the European Focus, and the continued goodness of the Fusion. Chevy may be the only GM arm that is situated nicely here, but will end up being the big loser unless it moves its ass on the Cruze. Too bad they lost Saturn. Saturn was perfectly niched for just such an occasion.
    50merc :
    October 29th, 2009 at 6:29 pm

    Negative interest? Jeez, just cut the up-front price.

    threeer, you’re terribly old-fashioned. And smart. However, you made a small error by saying there’s “no interest” with your method. There’ll be interest, sure enough, but you get to collect it instead of pay it. Which helps subdue those bouts of new car fever.
    ihatetrees :
    October 29th, 2009 at 7:44 pm

    50merc:
    Jeez, just cut the up-front price.

    I’m waiting for the next (real, proper) BK filing, where new, nicely equipped 4×4 Silverados list for < $15K… (although with no warranty…)
    Kendahl :
    October 29th, 2009 at 10:19 pm

    A few easy steps to vehicle ownership:
    1) Save cash
    2) Purchase vehicle with said cash (preferred 3-5 year old used)
    3) Keep car for 3-5 years
    4) Repeat steps 1-3
    No payments, no negative equity, no interest rates…

    Change 3) to 13-15 years.
    Change 4) to buy the car of your dreams.
    No longer any need to repeat.
    ronin :
    October 30th, 2009 at 7:21 am

    “I truly believe that we are witnessing a major change in the automotive market. People were only able to afford $35,000+ vehicles by using home equity loans. If that source of income is gone, or greatly reduced, not only will people be buying less expensive vehicles,

    Take it a step further. It’s not that people will only afford cheaper cars. It’s that cars themselves will need to become cheaper. The market determines the street price, not marketers in the office.

    We are seeing some indication of falling prices, despite artificial rising of MSRP. The ‘discounts’ and ‘incentives’ are actually de facto price cuts.

    The only reason prices have’t dropped further is that your government stepped in to help prop up high car prices. Where the automakers would have been forced by the market to drop prices or die, the government told them they no longer need to rely on the market to make money, and that instead taxpayers will be forced to give certain hand-picked automakers (those about to default on debt to bank buddies) free money forever.

    That kinda skewed the market. If the domestic prices weren’t dropping, the imports surely saw no reason to be in a hurry. So the government’s solution to more car sales is to keep the prices high. How’s that working out?
    dolorean23 :
    October 30th, 2009 at 11:18 am

    The only reason prices have’t dropped further is that your government stepped in to help prop up high car prices. Where the automakers would have been forced by the market to drop prices or die, the government told them they no longer need to rely on the market to make money, and that instead taxpayers will be forced to give certain hand-picked automakers (those about to default on debt to bank buddies) free money forever.

    Completely agreed but with caveat. Government intervention was to contain the dyke to prevent flooding the market with debt overflow. Its supposed to be a temporary solution, sort of like methadone to a heroin junkie. But just like heroin, its going to be tough to get GM to kick their habit and change their ways. Which will, like any addiction, only happen if GM has the will to do it.
    threeer :
    October 30th, 2009 at 11:36 am

    @50merc: I’ve been called alot worse than old-fashioned! I take that as a compliment. And I’d rather have the interest working for me than against me. Point made, thanks!

    @kendahl: folks do need to drive, so waiting 10-15 years might be a bit tough. And hey, I am a carguy…waiting 10-15 years to buy a car would be somewhat impractical. Perhaps buying $3500 run-around cars every few years while saving those 10 years for the dream car would be a good compromise!


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: