GM (GM): An "Interest Free" Myth

There is no more such a thing as "interest free" car loans than there is Big Foot in the northern forests. There may be tracks in the snow, but, out beyond the tree-line, there is nothing. It is a myth because there is no such thing, no matter how many delusional trackers want it to be.

GM (GM) has decided to offer "interest free" loans on many of its cars for up to six years. If the customer does not like that, he can get up to $7,000 of cash back.

Even among dunces, the idea of "interest free" is known to be a sham. The buyer gets a good deal, but GM has to come up with the money somewhere. With its own cash balance falling due to weak North American sales, the capital for these programs actually carries a very dear price.

Over time, GM and its customers get eaten alive by "interest free". When GM wants to raise the price on 2009 models, everyone remembers that the same car, just a bit older, was available for thousands of dollars less. Holding the new price is almost impossible. GM never recovers.

The man who gets his car off the lot with the special incentives will find that car loses its value fast. Bought cheap, stay cheap. GM may sell an additional 50,000 pick-ups. When the buyers all trade those in three or four years out, they will be competing for the same used car or trade-in dollar. The cycle of excess supply will repeat itself.

Time will have passed but not the tide.

Douglas A. McIntyre