Why Cheap Financing Has Led to More Auto Sales

car dealership showroom
Auto sales are on the rise. In September of 2012, annual auto sales surpassed a Morgan Stanley estimate and reached 14.8 million vehicles. This is the industry’s highest level since March of 2008, one of the first months into the Great Recession. According to an Equifax report, the total value of auto lending rose by nearly 14 percent since 2011. Consumers borrowed more auto loans in the first half of 2012 than they did in all of 2007, which was before the financial crisis spun the global economy into a recession.

Fueling this increase in sales is cheap financing. Auto loans haven’t been at affordable interest rate levels such as these in a long time. Questions about auto loans rarely ask why interest rates reach certain levels since consumers are generally happy to just enjoy affordable cars. However, since interest rates determine affordability, it is necessary to more closely examine the increase in auto sales alongside interest rate levels.

The Low Down on Low Rates

Low interest rates incentivize both borrowing and lending. Auto loans, unlike mortgages, are being lent at a faster rate because they have a lower tendency to default. This is because people rely on cars to commute to jobs, interviews, and classes, so naturally borrowers avoid defaulting on payments which would lead to their vehicle being repossessed.

The rise in auto lending is also due to another factor: the difference in willingness between traditional lenders, such as banks and credit unions, and lenders at dealerships. Dealerships—which are often owned by car manufacturers—are inclined to want to close a deal and generate a profit for the business as a whole. Turning down an applicant after hours of car shopping is a wasteful practice. In contrast to this at banks and credit unions turning down an applicant is far more routine. Banks and credit unions typically only offer auto loans to borrowers with above average credit scores. Dealership-based lenders, on the other hand, are far more inclined to approve low interest financing for borrowers that have fair credit scores.

“The money is so cheap now. Higher resale values and cheap money has been enabling automakers to offer some of the most attractive leasing programs we’ve seen in years,” said Jesse Toprak, an analyst with

Since most major car manufacturers own financing divisions or subsidiaries, they have been able to capitalize on this trend by profiting off a high volume of low-interest auto loans. The financing divisions of Toyota and Ford offer zero percent financing to some buyers of certain car models. But buyers of other manufacturers’ models can still readily find affordable financing, even if they have low credit scores. Within the car industry, the number of buyers within “Tier B,” or those with credit scores from 650 to 679, rose 26 percent this year, according to a Bloomberg report.

While not all applicants will qualify for zero percent financing, they can still take advantage of record low interest rates and the eagerness of dealerships to sell cars amidst a slow economy. Getting a car now—with an affordable interest rate—can be a wise long-term decision enabling mobility for many borrowers.

But current low interest rates—and zero percent interest rates—are not the only reason for the boost in car sales and increased auto loan lending.

Out With the Old, in With the New

The recession gave a boost to used car sales since cash strapped borrowers opted to hold onto used vehicles or purchase more affordable used cars, rather than indulge in costly new vehicles. Unfortunately, it’s been quite a few years since the recession began and many used cars—already having a number of years on them—have aged past the point of repair.

“The average age of cars on the road today in the U.S. is the highest ever recorded and consumers are ready to replace these older vehicles. The financial picture has improved sufficiently that we are seeing auto lending markets become facilitators rather than obstacles,” said Amy Crews Cutts, chief economist with Equifax, in a CNBC interview.

Now that the economy has begun to stabilize, albeit while maintaining high unemployment, more Americans are finally feeling secure enough to borrow auto loans towards a new car. Many Americans are now able to make purchases rather than put the bulk of their wages towards paying off old debts—such as credit cards. This trend could potentially be part of a strong economy slowly reawakening into the American juggernaut we once enjoyed before the devastating recession.