For almost 20 years, car buyers have been able to scoop up financing deals with 0 percent interest for the life of the loan. However, said loans are becoming increasingly uncommon, and experts expect they’ll likely disappear altogether.
The Wall Street Journal reported the percentage of new vehicles financed at fewer than 1 percent interest fell 5.3 percent in September 2018. The figures represent an 8.2 percent decrease from September 2017 and an 11.7 percent decrease from September 2016. Only 3.4 percent of new cars sold in September of this year were attached to 0-percent interest loans.
The premise of a 0-percent loan first burst onto the scene at General Motors. The U.S. automaker adopted the policy following the September 11 terror attacks in 2001 as part of a “Keep America Rolling” campaign. Other automakers quickly jumped on board, but today, such loans are becoming harder to justify for automakers.
In the past 18 months, the Federal Reserve has hiked benchmark interest rates over five times, which means 0-percent interest loans cost automakers more money. A 1 percent increase leads to an additional $800 an automaker must absorb on a $30,000 car, for example. Today, the average finance rate for a new car sits at 5.75 percent. In 2016, the average rate was 4.82 percent, which reflects the benchmark rate increases as the Fed works to control inflation and notes an overall healthy American economy.
Meanwhile, Americans are financing their new cars for even longer periods of time. In the second quarter of 2018, interest costs increased to $5,477 on the average new car loan, which is up 21 percent from 2017. For years following the global financial crisis, 0-percent interest rates were one of the few motivators to drive Americans into showrooms to buy a new vehicle. With a healthy economy, consumers should be prepared for higher interests rates when it comes time to buy a car in 2019.