Low APRs Drive Store Profits Up

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, Automotive News reported. In addition, dealers are moving more used-car shoppers into new vehicles and leasing deals are luring sidelined customers back into showrooms.

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.

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.

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.