Consumer loans have all but dried up at banks. This has forced auto dealers who want to sell cars to offer financing themselves. A few years back getting a loan at a car dealer was an act of desperation, and you got way above market rates, even if your credit was reasonable. Now, if you need credit the best place to get it from is the dealer.

Please consider Car Dealers Roll Out Cheap Financing

Today, with bank lending still tight, dealers’ lending arms are stepping in with more of their own loans at much more attractive rates. The current average interest rate on a car loan is 5.9%, but the rates offered through dealers are much lower, at 4.2% on average, according to interest-rate trackers HSH Associates and Some dealers are offering loans at or near 0%. And unlike past low-interest financing offers, these rates are increasingly available on longer loans for a wider variety of cars, including luxury vehicles and across popular brands like Toyota and Honda.

On the 2011 Toyota Camry sedan, with a base model price of about $20,000, consumers can get 0% financing for up to 60 months at some dealers. Put $2,000 down on a five-year loan (the average length of most auto loans) at 5.9% and you’ll shell out $840 more in interest over the duration of the loan than a dealer-financed borrower who locks in 4.2% and around $2,820 more than a buyer who scores a 0% interest rate.

Typically when dealers offer a loan, they do so at a rate several percentage points higher than what a bank or credit union might offer. The dealer isn’t lending his own money, he’s just a middleman — the money for the loan comes from the lending arm of the dealer’s associated automaker. And everybody makes money.

But now dealers are offering interest rates that are 0% or close to it — for less than what it costs a financing arm to raise capital to lend. In this case, the dealer is not making money, and, because the automakers subsidize the loans to help dealers move cars that aren’t selling, the automakers are losing money. On average, automakers lost $2,139 for each car they helped finance in 2010, slightly less than the $2,229 they lost per car in 2009, according to

Assuming GM’s recent profit reports are legitimate, the dealers are not losing money overall even if they are losing on financing. Profit stems from debt writeoffs in bankruptcy and renegotiated union contracts. Inventories are rising, but so have sales. It will be interesting to see how GM fares in another consumer slowdown that I believe is coming.

Mike “Mish” Shedlock
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