Auto Makers Pile On Buyer Incentives

by Jonathan Welsh
Thursday, September 13, 2007 provided by the Wall Street Journal Online

The home-mortgage mess is hitting the auto business, as interest rates on car loans creep upward and many people find it hard to qualify for credit to buy a new vehicle. But for consumers with good credit, it’s deal time.

Auto dealers are eager to clear out a growing number of leftovers as 2008 models arrive. Some have more unsold current-year models than usual in stock, reflecting an industry wide sales picture that worsened through the year. Total U.S. auto sales could fall below 16 million vehicles this year, according to analysts — the lowest in a decade. To clear up the glut, some car makers — especially the Big Three U.S. companies — are using perks like rebates and low financing rates to attract interest.

Lincoln MKX, and Chrysler LLC is offering a $4,500 rebate on its 2007 minivans. Even the notoriously incentive-stingy Honda Motor Co. is offering below-market 2.9% financing on its popular Odyssey minivan. All told, the percentage of transactions involving rebates grew to 49% this summer from 42% a year ago, according to Power Information Network, a unit of researcher J.D. Power & Associates. In certain cases, buyers don’t even have to settle for the outgoing model: Some 2008 models also carry surprising incentives. Chrysler’s Jeep Commander, for example, offers a $3,000 rebate.

Assessing the effect of the subprime crisis

Difficulties in the subprime-mortgage business and the broader decline of home prices in many markets have hurt other parts of the economy, but car makers, dealers and others in the auto industry are still assessing their effect. The housing market has a big impact on consumers’ ability to afford a new vehicle, and many are buying less-expensive cars with fewer luxury features or putting off purchases altogether.

The result has contributed to the retail auto sales slowdown. The National Automobile Dealers Association had predicted earlier this year that 2007 sales of cars and light trucks in the U.S. would total about 16.5 million, roughly the same as last year. Now the trade group says sales could fall as low as 16.1 million.

At the same time, 24% of auto financing and leasing transactions in July and August had interest rates lower than 5%, compared with 33% in the year-earlier period, according to J.D. Power. In August, the average rate was 7.3%. Fuel prices also remain high, and a weak dollar continues to make certain European models expensive.

The National Automobile Finance Association, a trade group that represents subprime lenders, says the mortgage crisis and changes to federal law that make it more difficult for consumers to file for bankruptcy protection have driven up the number of car-loan delinquencies. The group says nearly 12% of subprime vehicle loans reported by its members were delinquent last year, up from 6.5% a year earlier.

Autumn: Best time to go car shopping

Savvy consumers have known for years that autumn is the best time to shop for a car. The pending flood of new models in October and November drives dealers to more aggressively market vehicles from the outgoing model year in the fall.

In the past 20 years or so, however, manufacturers have increasingly sought to set their new cars apart by bringing them to market at other times of the year. The practice has blurred the lines somewhat between this year’s and next year’s models. Manufacturers favor the approach because their vehicles tend to get more attention from consumers who aren’t distracted by the regular introduction of several competing models. For dealers, it’s a way to bring people into their showrooms during what would otherwise be slow periods.

British off-road vehicle maker Land Rover, a unit of Ford, rolled out its LR2 compact luxury SUV in April as a 2008 model. The early introduction placed it ahead of similar models expected from rivals. The car maker’s finance arm, Land Rover Capital Group, offers a 3.9% finance rate—on the low side for a new model. But consumers can often find attractive rates through banks and credit unions, so a car company’s so-called captive finance businesses often use lower rates as a way to draw more customers who would otherwise arrange loans elsewhere.

Christopher Marchand, Land Rover’s vice president of retail operations, says the 3.9% finance rate on the LR2 is “middle of the road” when compared with what buyers might find at a bank. Still, consumers who have watched finance rates increase lately are likely to find the rates attractive, says Paul Taylor, chief economist for the National Automobile Dealers Association.

“In an increasingly more difficult credit environment, a range of 3.9% to 7.9% is looking pretty good,” Mr. Taylor says.

The well-reviewed Kia Sedona minivan, a product of Hyundai Motor Co., is offering buyers $3,000 cash back on 2007 models. General Motors corp. is dangling a huge rebate — as much as $7,500 — on its high-end Cadillac XLR, which lists for $78,335, and is offering 5.9% financing on the just-released 2008 Buick Enclave.

Chrysler’s Sebring, a midsize sedan that competes with top-selling models like Toyota Motor Corp.’s Camry and Honda’s Accord, was redesigned about a year ago and is now available with 0% financing or a $1,500 rebate. Such deals are often advertised and relatively easy to find when researching cars on the Internet. However, there are other incentives that manufacturers dole out locally for dealers to use at their discretion.

Toyota rarely offers incentives on its best-selling Camry sedan or most of its other models, but a Toyota spokesman says the company does use so-called dealer incentives “for tactical purposes,” or on a case-by-case basis to attract customers.

And they do attract customers, even to vehicles that might seem unappealing. Though sales of gas-guzzling large pickup trucks like the Ford F-150 and Dodge Ram are down 2.2% for the year, Mr. Taylor says, there was an upswing of 9.1% in August sales thanks to “vigorous incentive competition” among makers like GM, Ford and Toyota that included rebates in some cases of several thousand dollars.

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