Tuesday, June 24, 2008

GM Extending No-Interest Car Loans to 6 Years

According to this Bloomberg article, General Motors will begin offering no-interest car loans on certain pickup trucks and SUVs for as long as 6 years. I suppose that this indicates a certain amount of desperation to sell these gas-guzzlers, but what strikes me is the “no-interest” part of this story.

Surely most people understand that they’re not really getting a no-interest loan. In reality, they are paying an inflated price that includes the real vehicle price plus the loan interest amount. For loans extended to 6 years, the advertised price is just inflated by more. Even worse, no-interest loans are often only available on fully-equipped vehicles with many overpriced options.

When it comes to paying cash versus financing a vehicle, Phil Edmonston’s Lemon-Aid Guide explains the dealers’ preference for financing:

“Let’s clear up one myth right away: Dealers won’t treat you better if you pay cash. They want you to buy a fully-loaded vehicle and finance the whole deal. Paying cash is not advantageous to the dealer, since kickbacks on finance contracts represent an important part of the F&I division’s profits. Actually, barely 8 percent of new car buyers pay cash.”

Edmonston goes on to list hidden loan costs and an interesting scam. This scam begins after you purchase a car and leave your trade in. Then you’re told that your loan was rejected and your trade-in has been sold. You’re then forced accept higher payments to get the loan. This shows the importance of getting a signed agreement saying that financing has been approved. Or better still, save up and pay cash for your car.

4 comments:

  1. Michael
    Great post. Wish I had thought of it a topic for my blog. When I heard the news, I thought GM was perhaps desperate enough to move inventory that they were actually giving customers a break. Is there data – e.g. prices before and after the offer, etc. – to confirm?

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  2. Larry: Thanks for the kind words. I wasn't able to find information online to confirm whether GM has kept nominal prices the same (thereby effectively lowering the real price), or whether they increased the nominal price to keep the real price constant.

    The Bloomberg article I pointed to in my post includes the following:

    "GM also will raise prices on several 2009 models by about $1,000 each, or an average of 3.5 percent, because of materials costs, currency exchange rates and new technology."

    It's not clear to me whether this increase will apply to the models that will be offered with a 6-year "no interest" loan.

    I'll have to leave further digging to real reporters, like yourself.

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  3. I was just thinking about this exact same thing today while watching an ad on tv. 0% financing on automobiles, do they jack up the price or hit you with restrictions? Or is it just a sign of desperation to move product? Thanks for pretty much confirming my thoughts on this, nothing comes for free.

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  4. Speaking as a victim/idiot who did buy a GM Van with 0% interest over 5 years, I am just glad I bought the extended warranty as well.

    We got pressured into buying MORE van than we needed and at the end of it, it was not worth the money we sunk into the Lemon.

    Buy a good quality car, or a used car you can afford and you will do much better (IMHO).

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