0% interest = no profits (cars)

Watching a local TV station the gentleman representing GM said his company can’t make a profit as they were selling cars at 0% financing or low financing.

What exactly does this mean? That for the auto industry it is only the interest that makes profits? That if they sell a car for say 20,000 dollars it took that much to build the car?

IMHO, it means that he was lying or sorely mistaken.

It might not take $20k to build the car, but it might get closer if you factor in advertising and marketing and stuff like that.

I believe that one of the ideas behind auto makers offering low (no) interest financing is to build brand loyalty.

I agree with Smeghead though, I can’t imagine they’re just breaking even.

What it means is that General Motors Acceptance Corp. (GMAC) does not have bags of money laying around in order to pay for the cars. They (GMAC) have to go borrow money in order to have the money to lend. The banks that GMAC borrow from don’t offer 0% fianacing so GMAC is taking a loss on the deal. GMAC then passes the loss back to General Motors and this amount of money decreases the profit that the General makes on the sale of the car. Exactally the same way that a rebate reduces the profit a car maker makes on a sale.

Is it possible to have the incentives eat up all the profit? Probably, it would depend on the offer, and the cost of money.

Rick is accurate. I work for a GM competitor, and we have the exact problem as described.

As a company, we’d be better off letting customer finance through their own banks/credit-unions/finance-companies, but would not then be able to offer such incentives (i.e., we can’t tell Bank One to loan to our customers at 0%).

The alternative, of course, is to keep prices/incentives/interest-rates the same, sell fewer vehicles, lay people off, and make the same amount of money. Actually, paying for unemployment would be more expensive, so this is the cheaper out in the long run.

So yeah, we’re all having record-level sales years and not making money. We have stockholders to answer to, so you can be assured that it’s true (well, unless we’re enronning you [I hate to verb that {and that}]).

Note that very few buyers actually qualify for 0% financing. Most buyers end up paying Real Money for financing. Yeah, profit margins are slim, but only a small part is due to low financing. People’s perceptions are being manipulated at both ends.

if X amount of GM’s profits came from Y amount of interest on GMAC loans, then a % of profit is gone on 0% financing.

Some company might see profits slip to Z percent, and would then point out that during a month, profit was zero (hinting that regular intersest income forecasts were 0, thus hurting profit margin.

It’s all semantics.

Probably what they are saying is that it’s 0% interest for 4 years, but if you haven’t paid for the car by 4 years, they can charge you 22% interest all the back to the day you bought it. I saw a program on this but it was for furniture.

But then why not just raise the price of the cars?

Many buyers get 0% financing – those with good credit. Contrary to popular perceptions, it’s not that difficult to maintain a good credit record. If you’re younger, then you have to wait for that good credit record. There are other threads here will talk about getting a good credit record. But there’s nothing magical about getting 0% interest.

Now any interest below the rate of inflation is negative interest. This means that giving 3% rates (for those will less than good credit) still loses money if inflation is at 3.1%.

Handy that’s how it works for those furniture stores and other places – no payments, no interest for one year. But you make your car payment monthly; there will be no back-charging of the interest.

We can’t raise the price of cars, because that would involve a massive price-fixing conspiracy amongst all auto makers. We’re market driven, and increasing prices would drive us out of the market.