Zero percent auto loan is fading into rearview mirror

Carmakers that used zero-percent financing offers to juice sales at the height of the American auto boom are starting to abandon them as rising interest rates lift their own borrowing costs.

The average interest rate on consumers’ new-car loans climbed to 5.7 percent in March, the highest since 2009 and up from 5 percent a year ago, according to Edmunds. Zero percent offers fell to 7.4 percent of auto loans last month, down from more than 11 percent the prior year and the lowest share in more than two years, the car-market researcher said.

“Nobody wants to be the first one to go from zero to 0.9 percent, or from 0.9 percent to 1.9 percent, but you’re going to see zero no longer be the norm,” Jim Lentz, the chief executive officer of Toyota’s North American operations, said in an interview at the New York auto show last week. “That has to be pushed along. That will impact, marginally, some people getting pushed out of the market.”

Car manufacturers that took advantage of near-zero benchmark rates to cheaply lure buyers into showrooms now have to look to other tools in their battle for market share. As those kinds of financing deals fall off the table, automakers are leaning more on cash incentives or discounted lease payments to draw buyers within a shrinking market. J.D. Power estimates car companies were offering discounts of more than 10 percent off suggested retail prices as of mid-March.

Toyota has already been reducing its zero percent financing offers. They made up 13 percent of the Japanese carmaker’s U.S. sales in February, the latest month for which data is available, down from 17 percent one year prior, Edmunds estimates.

The Federal Reserve raised interest rates last month for the sixth time since it began tightening monetary policy in December 2015, lifting the benchmark policy target range to between 1.5 percent and 1.75 percent.

“It’s hard to support zero financing in this type of environment,” Henio Arcangeli Jr., Honda Motor Co.’s top U.S. sales executive, said last week in an interview at Bloomberg News headquarters in New York. “It’s very expensive.”

While tightening credit and rising average vehicle costs are expected to weigh on new-car sales this year, automakers didn’t feel much of the pinch in March. Several major manufacturers trounced analysts’ estimates, with Fiat Chrysler Automobiles and General Motors riding booming sport utility vehicle demand to bigger-than-expected sales gains.

Arcangeli said Honda — which is known for keeping its incentives low — isn’t offering zero percent financing, and he expects rivals will soon follow suit. “The companies that are at zero percent, our sense is they’re going to start going from zero to 0.9,” he said. “But there’s a lot of things that have surprised us already — they’ve held on for so long.”