Auto Financing

Have you been thinking of buying a new car? How about a six-year loan with a low down payment with 1.9 percent interest? Columnist Jeff Green of Bloomberg News reports that a Ford dealer in Cuyahoga Falls, Ohio has increased his sales by 7 percent in February, in large part by offering customers very attractive credit terms. For example, he cites monthly payments of $352.95 on a six-year loan of $24,000 for a new Ford Taurus. While that loan carries an interest rate of 1.9 percent, customers may select a five-year loan requiring a month payment of $400 at zero percent interest. One downside of these arrangements is that "car buyers are more than twice as likely to default on a six-year loan." However, since Ford Motor Co. carries the credit risk, Ford dealers are content.

The automobile finance companies are not the only firms that offer six-year loans. BankOne Corp. and Bank of America Corp. are also offering six-year loans. The interest rates charged by auto finance companies range from range from 1.9 percent to 4.9 percent, versus the 6 percent to 10 percent annual rates charged by commercial banks. Of course one motive for the auto companies to offer low financing rates is to encourage consumers to purchase new cars from their dealers, rather than used cars.

Finally, we like the comment of Professor Tony Plath, a banking professor from the University of North Carolina: "This is going to encourage predatory borrowing. People will just walk away with a free car and stop paying."