Zero percent loans grow scarcer in auto transactions

Higher interest rates, lower levels of vehicle inventory, and other factors are all contributing to a pullback on zero percent interest offers, according to the automotive site Edmunds.

In an analysis of auto sales for the month of August, Edmunds found that zero percent financing has been halved in the past two years. A total of 7.4 percent of auto financing transactions in August included zero percent financing down from 14.6 percent in August 2016 and 10.4 percent in August 2017. The report noted that the evaporation of zero percent financing deals is unusual for this time of year, since they typically peak in August and September.

Zero percent financing is usually provided by an automaker or dealership instead of a bank or other lender. The offer, which can save a buyer a considerable amount of money over the life of the loan, is frequently made to help clear out older vehicles before the arrival of newer stock.

While an interest-free loan can help a buyer pay off their vehicle, it often requires a borrower to have a high credit score. The option may only be available for certain vehicles and come with a number of restrictions or conditions, such as monthly processing fees or a limit on the length of the loan.

"August truly represents the month that we would have expected to see a turnaround in this trend if one was imminent," said Jeremy Acevedo, manager of industry analysis at Edmunds. "Moving forward, shoppers will likely need to do a bit more digging to find other ways to save on a new vehicle because it looks like zero percent finance deals are going the way of the dodo."

Higher interest rates on auto loans were one factor deterring automakers and dealerships from offering zero percent financing. The annual percentage rate for a new vehicle purchase averaged 5.81 percent in August, up from 4.85 percent the year before and 3.92 percent in August 2013. In used vehicle transactions, the average APR went from 7.67 percent in August 2013 and 7.54 percent in August 2017 to 8.33 percent in August.

Edmunds also found that end-of-summer inventory levels were at their lowest point since 2016. The report said this meant dealers and automakers were less willing to offer costlier incentives in order to clear out older models.

"Automakers have done a decent job this year at aligning inventory with demand, so there's no need for dealers to have a fire sale," said Acevedo. "Manufacturers seem to be more comfortable with a longer selldown period that leverages targeted incentives, instead of an aggressive 'everything must go now' mentality."

While all automakers showed less willingness to offer zero percent financing to buyers, Nissan and Toyota had the most pronounced reduction in these offers. A total of 4.8 percent of Nissan's sales in August were made with interest-free financing, plummeting from 13 percent the year before. While 21 percent of Toyota's sales in August 2017 included zero percent financing, the share was down to 4.6 percent a year later.

"In a somewhat self-fulfilling manner, because fewer automakers are participating in these programs, there is less impetus for other automakers to participate to be competitive," said Acevedo. "Sometimes incentives are a bit of a follow-the-leader game."