Toyota forcing low APR’s improving profits for everyone

Toyota forcing low APR’s improving profits for everyone

 

Cheap financing is giving dealers the opportunity to sell a rich mix of products and more finance and Insurance add-ons.

Because the deals reduce monthly payments, some customers are buying bigger or better-equipped vehicles or service contracts. Dealers are moving more used-car shoppers into new vehicles. Leasing deals are luring sidelined customers back into showrooms.

"I love it," said Bob Rohrman, owner of the 30-store Bob Rohrman Automotive Group in Lafayette, Ind. "That lower monthly payment is an opportunity to sell a customer an extended warranty or life Insurance that he couldn't afford before."

Thanks to incentives, the industry average finance rate on a retail car loan sank to 4.4 percent in March, the lowest since 2002, Edmunds.com reported.

The industrywide average dropped sharply from February's 5.3 percent and is 2 percentage points lower than two years ago.

Steve Landers, a partner in RLJ-McLarty-Landers Automotive in Little Rock, Ark., said the low rates and finance incentives reopen transaction options he hasn't had for months at some of his group's 23 stores.

"We weren't doing any leases," he said. "Now we're back up to 10 or 15 percent'' of overall new-vehicle transactions from leases.

Dealers say the incentives lift per-unit margins slightly, but the spiffs' biggest effect on store profits is higher volume. Last month U.S. sales jumped 24 percent from a dismal March 2009.

Incentives drove sales in March, and manufacturers haven't backed off in April, said Jessica Caldwell, senior analyst for Edmunds.com.

"Toyota offered pretty generous terms with leasing and 0 percent loans on most of its models," she said. "General Motors and Ford had 0 percent on some models, too."

The average Toyota factory auto loan rate was 1.9 percent in March, compared with 4.1 percent in February, Caldwell said. Most major competitors cut captive finance rates, too.

Big incentives from captive finance companies pushed the industry's leasing penetration up to 17 percent in February and March, compared with just over 10 percent a year ago, Edmunds.com said. That compares with a high of 20.4 percent in June 2001, Caldwell said.

Rohrman said the factory incentives don't affect the profit made by dealerships for arranging loans. "Most banks and captives pay you flat fees instead of accepting a percentage markup these days, so nothing changes," he said.

Nick Stanutz, senior executive vice president of Huntington National Bank in Columbus, Ohio, said factory incentives helped his bank's auto lending by expanding the market.

In March, Huntington booked its highest auto lending volume in a decade, focusing on the Midwest and prime and superprime paper, Stanutz said. "Our average FICO [credit] score is 760, but we'll buy some paper below 700 from dealers we have a relationship with," he said.

Dealers say business is getting better, but slowly.

"It's certainly better than it was last year, but it's tentative," said Peter Allen, general manager of Egglefield Ford in Elizabethtown, N.Y. "We have some very good days, and then days where you don't see anybody."

Rohrman said credit availability is starting to improve. He pointed to independent banks in Illinois and Indiana that are buying more paper, approving lower credit scores or even lowering interest rates to compete with captives and credit unions.

"I had one bank cut its auto loan rate from 6 percent to 3.5 percent," he said. "Banks are starting to have a greater appetite for risk."

But Landers sees few signs of a thaw in the Southeast.

Allen said two lenders in New York are raising loan standards because of a local uptick in repossessions, and Ford Motor Credit Co. is easing terms but is tighter than a year ago.

Still, he's encouraged.

"You call a customer and suggest it's time to at least look at the numbers," Allen said. "Last year they didn't want to talk. Now, at least, they listen."

 

Source: [ Automotive News ]