Ford Motor Co. (NYSE: F) offers a 0% annual percentage rate (APR) for six years (72 months) across its entire model line, presumably to clear out 2016 models. The deals come at a time when car finance defaults, blamed to some extent on long loan repayment programs, have skyrocketed. Ford has taken on at least some degree of trouble because of the trends.
The “Ford Freedom” sales event requires buyers to use Ford Credit APR financing. Ford Credit is part of Ford. That means it takes on either the benefit or problems with the loans.
To put the loans in perspective, they will be paid through 2022. According to Carfax:
Don’t be fooled into thinking depreciation slows much after the first year. The fact is, new cars continue to lose value for four more years, averaging a decline of 15-25 percent per year. On average, a new car will lose 60 percent of its total value over the first five years of its life.
For some buyers, the final year or two of six years financing are ones when the sale of the car likely will not cover the balance of the car loan. While not a perfect comparison, the problem is not unlike an underwater mortgage.
While many people who finance cars for long period do not fall into the subprime category, enough do to make these loans dangerous for the companies that fund them. According to Bloomberg:
Rising delinquencies come as a warning sign that more loans may end up in default down the road, said John McElravey, an analyst at the bank (Wells Fargo). What may be most troubling, however, is that the default rate is already climbing, up to 12.3 percent in January from 11.3 the prior month. That is the highest rate since 2010, the data show.
Securities backed by auto loans are structured to absorb a portion of anticipated defaults, but concerns have mounted over the last year that cumulative losses on auto loan securitizations may end up exceeding initial estimates, thanks to declining underwriting standards.
While car credit companies clearly do not want to lose money, there is an extent to which they cannot avoid it with some of their customers.
The Ford 0% APR financing for 72 months is extremely attractive. One question about it is how many of the borrowers will pay the entire balance.
Sponsored: Tips for Investing
A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.