Zero-percent finance deals hit record in April

Those “well-qualified buyers” certainly appeared to take advantage of the generous financing terms captives offered in April based on the information shared by Edmunds on Friday morning.

Edmunds reported that zero-percent finance deals surged to a record level in April as automakers “pulled out all the stops” to encourage new vehicle purchases during the coronavirus crisis.

Meanwhile, Edmunds noticed that the average rate for used-vehicle financing actually edged a tick higher year-over-year.

According to an Edmunds news release, zero-percent finance deals accounted for 25.8% of financed new-vehicle purchases in April, compared to 4.7% in March and 3.6% in February. This is the highest level of zero-percent finance deals that Edmunds has on record dating back to 2004.

Edmunds analysts pointed to the abundance of zero-percent finance deals as the driving force behind a significant drop in interest rates. The annual percentage rate (APR) on new financed vehicles averaged 4.3% in April, compared to 5.8% in March and 6.3% a year ago. This marks the lowest average APR since August 2015.

“It’s a buyer's market,” said Jessica Caldwell, Edmunds’ executive director of insights. “And while there aren't a lot of buyers right now, those in a position to purchase a new vehicle are taking advantage of the most generous financing programs we've seen this century.”

Edmunds experts warn that some consumers might be making riskier purchasing decisions due to the greater availability of zero-percent, 84-month term contracts.

According to Edmunds data, the average term length hit a record high of 73 months in April, and 81% of vehicle buyers who financed their vehicle agreed to a loan term between 67 and 84 months.

Edmunds data also reveals that consumers are stretching their budgets for more expensive vehicle purchases — the average amount financed for a new vehicle climbed to a record high of $37,681 in April, while the average down payment dropped to $3,159 in April, a 21% decline compared to March and the lowest on record since July 2011.

“For the fiscally responsible buyer, this is a great deal, but for others, this could spell trouble,” Caldwell said. “Although longer loan terms help make financing larger purchases more palatable, consumers who opt into these deals put themselves at higher risk for negative equity further down the road.”

Similar new-model pricing trends arrived from ALG and Kelley Blue Book on Friday morning, too.

ALG, a subsidiary of TrueCar, projected average transaction prices (ATP) to be up 5.7% or $1,986 from a year ago and up 2.0% or $713 from March.

“Despite our expectation that retail sales volume will be cut in half in April due to the impact from COVID-19, average transaction prices continued their upward trajectory, hitting record highs this month,” said Eric Lyman, chief industry analyst for ALG, a subsidiary of TrueCar. “This is primarily due to the enticing zero-percent interest rates being offered by automakers offsetting any model or trim concessions car buyers would be forced to make otherwise.

“These loans have been particularly popular with domestic truck shoppers,” Lyman continued in another news release. “U.S. manufacturers, such as Ford and GM, and their captive finance companies were one of the first to launch zero-percent interest rates on 84-month loans and those brands are seeing some of the sharpest upticks in average transaction price year-over-year. That said, Hyundai had the biggest year-over-year gain in average transaction price, with a 12.8% increase. This is mainly due to the redesigned Sonata and the widely popular, three-row, Palisade.”

Over at Kelley Blue Book, valuation analysts reported the estimated average transaction price for a light vehicle in the United States was $38,060 in April. New-vehicle prices increased $763 or 2.0% from last April, while prices dropped $102 (down 0.3%) from the previous month.  

“Although auto sales are expected to drop more than 50% in April, average transaction prices held steady from the earlier months of the year and rose by 2% year-over-year, likely helped by the abundant incentive offers enacted by automakers and finance companies in March of this year,” Kelley Blue Book analyst Tim Fleming said. “We observed a bit of a shift in the data this month as more price conscious segments increased more than normal.

“Car segments that were flat earlier this year showed increases across the board in April. At the same time, luxury segments took a dive, down nearly $1,500 from this time last year, as buyers shied away from these fast-depreciating models,” Fleming went on to say in another release.

New-Car Finance Data

Used-Car Finance Data

Source: Edmunds