Thursday, June 19, 2003

Lenders decry 0% financing

By Chris O'Malley, Gannett News Service
and Jeff McKinney, The Cincinnati Enquirer

Zero-percent financing offers from automakers have been a heck of a deal for consumers.

But while good for consumers and automakers, zero-percent deals are sending some conventional lenders into a skid.

Especially affected are credit unions, for which vehicle loans long have been the bread-and-butter of their portfolios. They're trying everything from coaxing members to take a cash rebate in lieu of zero percent to making low-interest loans on used cars.

Stephen Behler, president and chief executive at Kemba Credit Union Inc. in Queensgate, said the credit union's new loan business on cars has dropped about 20 percent since zero-percent financing was introduced.

Kemba is one of Greater Cincinnati's largest credit unions with assets of $225 million and 32,000 members.

"We don't have the ability to offer zero-percent financing because they're no income opportunity for us," he said. Zero-percent financing has "forced us to lower some car loan rates the past two months," he said.

He said the credit union also has been trying to educate members - and keep their car loan business as well - that zero-percent financing might not always be the best option.

"If zero-percent financing is the best deal, we encourage members to do it," Behler said. "But if we can offer a better deal and save them money, we encourage them to borrow with us."

Some entities like Sharefax Credit Union in Eastgate have retained business by working with car dealers.

Art Kremer, president of Sharefax, said his credit has an indirect car-lending network with about 60 dealers locally.

"That really helps us offset zero-percent financing because many of the dealers refer customers back to us," Kremer said.

Credit union new-car financing has been weak in each of the past three years, said Kay Neidlinger of the Indiana Credit Union League. A weak economy, consumers folding auto loans into refinanced mortgages and zero-percent financing have had an impact.

She said there's no way to measure exactly how each has affected new-car lending, "but anecdotal evidence suggests that zero-percent financing is playing a larger role," she said.

The impact of dirt-cheap financing from automakers is blunted to a greater extent at commercial banks, which tend to have broader portfolios that include mortgages and business loans.

Of customers choosing a manufacturer incentive - zero percent or cash rebate - it has been about half and half, estimates Bill Grimes, general manager of Tom Wood Pontiac-GMC-Mazda in Indianapolis.

"That's what's (driving) the market right now. It's fantastic," Grimes said.

A $20,000 car financed for 48 months at 4.9 percent - a rate that a credit union might give one of its most creditworthy customers - would cost $460 per month.

Total cost of purchase over four years: $22,065.

But at zero percent, that same car costs $417 a month - $43 less per month and $2,065 less over the full term of the loan.

So affordable was the financing - coupled with his GM employee discounts - that Charles Hughes of Indianapolis recently bought two vehicles: a Buick and a pickup. He ended up selling his older vehicles to his son and daughter.

"It not only is a boon for the consumer, but it definitely keeps the manufacturer's nose above" water, said Hughes, 84, a former GM employee.

Credit unions counter that some zero-percent deals have penalties for early repayment. Some also have shorter loan terms of less than five years, which makes the monthly payment unaffordable for some.

"The zero percent is a come-on," said Phil Reed, consumer advice editor at automotive Web site "It draws people in. Some of them don't qualify but they wind up buying anyway, sometimes at 4 (percent) or 6 percent."

It's all some credit unions can do to get a customer to compare the cost of zero percent with taking the cash rebate and financing at a more conventional rate.

"A word to the wise is, don't just grab the zero-percent financing and run. You should always compare the value of the rebate to the value of the zero-percent loan," said Matthew Will, a finance professor at University of Indianapolis.

How to decide between a rebate and zero-percent financing:

Step 1: Find the difference between the monthly payment at zero percent and the payment if financed at a higher rate.

Step 2: Multiply the difference by the number of months of the loan.

Step 3: If the total is lower than the amount of the cash rebate, take the cash; if not, choose the zero percent financing.

Consumers also should look at the total cost of the car, and check resources such as to see the invoice price of the vehicle.

The site also has a rebate-versus-zero-percent calculator.

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