If anyone had asked Alan Baker one month ago whether he intended to buy a new car, he "would've smiled and said, 'No way."' But when General Motors began offering 2.9% financing late last month, the Hacienda Heights food-company executive couldn't resist. He rushed out and bought a new Cadillac.
"I probably accelerated my purchase by at least a year and maybe longer," he said, noting that this was the first time he bought a car using financing provided by an auto manufacturer. In the past he bought cars using cash or bank loans.
Baker's purchase helps illustrate major changes that are transforming the $220-billion auto-loan market.
Cut-rate loans by the finance arms of General Motors, Ford and Chrysler have stimulated sales and allowed them to gain a greater share of the auto-loan market. Banks, which a decade ago held three times as many auto loans as finance companies, could lose their No. 1 position by the end of this year, some experts predict.
But the finance companies' gains have not come without hitches. Car buyers today are increasingly accustomed to low-rate financing or other forms of incentives, industry experts say. Sales fall off sharply when such programs are discontinued.
"It's like borrowing from Peter to pay Paul," said Alan Dietor, sales manager of University Ford & Chrysler in San Diego, noting that stronger purchases today may come at the expense of weaker buying later.
Meanwhile, the advent of these low-rate deals--coming amid growing variety in price and style of autos, increased consumer sophistication and other factors--has prompted auto-loan providers to offer a much larger, and often confusing, array of financing options.
Long gone are the days of the standard 20% down, 36-month car loan. Buying a car these days is becoming more like buying a house. Lenders offer no-money-down loans, loans with maturities ranging from two to eight years, variable-rate loans and balloon-payment loans.
"We're doing things that 10 or 15 years ago we wouldn't have ever dreamed about," William E. Odom, president of Ford Motor Credit Co., Ford's finance arm, said in a telephone interview. "Consumers are much more informed . . . and (loan providers) are much more concerned about what consumers want."
Charles Newcomer, spokesman for General Motors Acceptance Corp., General Motors' auto-finance subsidiary, said, "All the traditional assumptions about the auto-finance market are not necessarily true today." He noted that just as home buyers are increasingly picking 15-year mortgages over 30-year loans--despite the fact that shorter maturities require larger monthly payments--some customers are also asking for shorter-term auto loans, possibly reversing the trend of recent years toward longer terms.
The competition for the auto-loan business--and the need to churn out more low-rate financing deals--is likely to continue, some analysts predict. Car production in the next few years is expected to outgrow demand, as domestic and foreign auto makers add new manufacturing plants in the United States while imports, including those from South Korea and other Third World nations, increasingly flood the market.
The resulting glut of cars could put continued pressure on manufacturers to offer low-rate deals or other incentives to move merchandise. Importers such as Toyota, Nissan and Honda, who have largely refrained from the low-rate wars initiated primarily by General Motors, may be forced to join the fray, some analysts say.
That and other trends could further erode banks' market share, bankers fear. "There's no way we can compete with the domestic manufacturers' captive finance companies when they offer 2.9% programs" like General Motors', said Patrick W. Harrison, chairman of the consumer credit division of the American Bankers Assn.
The increased need to use computers and other factors are hurting smaller banks and "driving the market to fewer and fewer lenders," said Robert Monteith, a Security Pacific National Bank official who is chairman of the Consumer Bankers Assn. The association, seeking to stop banks' market share from sliding, has asked the attorneys general of 13 states, including California, to investigate whether auto-financing firms' practice of low-rate financing violates state laws regulating credit competition.
The Stakes Are Huge
The stakes in the battle for the auto-loan dollar are huge. Auto loans represent the nation's largest single category of non-mortgage consumer borrowing, accounting for about two-fifths of the $570 billion in non-mortgage installment debt. At many banks, auto loans account for 10% or more of total loans and other assets, and 50% or more of consumer loans.
To be sure, banks and credit unions are expected to continue to be major players in auto lending, even with manufacturers' low-rate deals. They are expected to remain strong in "direct" lending, where potential car buyers get loans directly from banks and then take the cash to dealers to buy cars.