One of the contributors to the rise in sales of cars and light trucks in the United States has to be the extremely attractive financial packages that automakers offer. Among these is the ability to buy a vehicle and get loans spread over a period of 72 months. Perhaps the fact that cars last longer than they used to has contributed to a fear of sales drop off. Or, perhaps car companies are hungry for buyers to keep their sales numbers improvement at rates that have kept the industry healthy through the past two years.
The length of car loans, at six years, is not the only attraction for longer financing packages. Interest rates on many of these are also extremely low. Ford Motor Co.’s (NYSE: F) Lincoln offers 1.9% APR on a 72-month loan, which means the company has decided to take the risk that, if interest rates rise, it is willing to potentially take a loss on these sales. Lincoln is among the car brands that have struggled to sell vehicles, so its aggressive financial offers should be expected.
However, six-year loans are also available on some of the top-selling cars in the United States. This includes General Motors Co.’s (NYSE: GM) Chevy Silverado and some versions of the Ford F-150 pickup, the most popular vehicle in the United States by sales. Ford does pass something to wed the risk for these longer loans to its customers. Six-year loans on the F-150 carry a 4.9% APR (although the finance package does has a $500 cash back feature).
What puzzles many analysts is why financing packages are so aggressive after remarkable rises in national vehicle sales in the country in 2012 and 2013. Part of the reason is that overall sales flattened in February. This could be attributed to winter weather. However, some signs suggest the sales improvement slowdown could last longer. Among these is a sharp rise in car inventory among many manufacturers. Another is that the replacement cycle has dropped off now that many Americans have purchased new vehicles in the past two years. The need to trade in a six- or seven-year-old car for a new one has tapered off.
Whatever the cause for the improved deals to finance cars and light trucks, one thing is obvious. To keep sales flowing, auto manufacturers have, in many cases, taken on more financial risk to sustain growth improvement.