Auto loans hit highest levels in 5 years;
dealers react by rolling out new rebates
By Lucy Lazarony • Bankrate.com

Two automakers are revving up customer rebates and incentives this summer, and it couldn't come at a better time for consumers: Bankrate.com research released today show interest rates on new car loans have hit five-year highs.

General Motors is awarding rebates of as much as $750 to Internet shoppers through its Ticket to Ride promotion. The Chrysler unit of DaimlerChrysler has launched a fresh round of hefty rebates on its cars, trucks, minivans and sports utility vehicles for the month of June while it is trimming back on discount financing.

"Consumers are certainly in the sweet spot right now," says Robert Ellis, director of CarBargains.com, which is part of the Center for the Study of Services, a nonprofit consumer research group in Washington, D.C.

"Some of the programs are sizable."

Serious rebates for summer
Chrysler rebates include $2,000 cash back on pickups and $1,500 to $2,000 cash back on minivans. Discounts on passenger cars include $1,500 rebates on Chrysler 300M sedans and $1,000 rebates on Chrysler Concordes, Sebring coupes and convertibles, Dodge Intrepids and Dodge Avengers.

As for GM, e-shoppers may use Ticket to Ride coupons in addition to any national or regional GM programs already in place.

"It's the first ever in the auto industry and a first for GM," says Gwen Knapp, a spokeswoman for General Motors. "We're trying to reach out beyond our traditional marketing and extend that into the e-world."

"We're trying to lead the pack."

The online promotion, which runs through July 15, also includes a sweepstakes and $50 gift certificates for people who test-drive a GM car or truck.

A sign of worry, not savvy
Some in the industry are less enthusiastic about GM's latest marketing pitch.

"I would argue that it's a sign of sweaty palms as much as it is marketing brilliance," says W. James Bragg, author of The Car Buyer's and Leaser's Negotiating Bible. He also runs Fighting Chance, a new-car pricing service.

"The companies that are making money don't have to be that creative."

U.S. automakers lost market share to foreign competitors in 1999. That trend seems to be continuing in 2000. In May, Chrysler saw its total sales nosedive 18 percent from a year ago. GM sales were down 5.8 percent in May.

In contrast, Toyota Motor Corp., Honda Motor Co. and Volkswagen saw sales rise in May.

"Detroit is going to continue to be vulnerable and need to use rebates at higher levels and more frequently," Bragg says.

Are rising rates sinking car sales?
The U.S. auto industry as a whole received a bit of a jolt in May. U.S. car and truck sales dipped 2 percent, according to Autodata Corp. The drop was the first since August 1998.

"Right now the industry is worried that with interest rate hikes and general trends that the long-feared cooling off period is finally here," says Paul Eisenstein, publisher of the automotive Web site TheCarConnection.com.

The Federal Reserve Board has raised interest rates six times since June 1999 in an effort to cool down the red-hot U.S. economy. The average national interest rate on new car loans is 9.57 percent, the highest rate since June 1995, according to Bankrate.com's weekly survey of national averages. Used car loans average 10.67 percent, the highest they have been since being added to the Bankrate.com weekly national survey in January 1997.

The rate hikes have consumers thinking twice about large purchases and automakers thinking twice about low-rate financing promotions. Each interest rate hike has made discount financing deals more and more expensive for auto manufacturers.

Chrysler, for one, has had enough. It scrapped its discount financing promotions at the national level and is rolling that money into cash rebates instead.

"We're allocating to make it better for consumers and make it easier to understand for consumers," says Dominick Infante, manager of international sales communication for DaimlerChrysler Corp. "We can put all incentives on one page and explain it. There's no fine print. There's no crazy details."

He points out with hefty cash rebates, customers will be able to make bigger down payments and borrow less. Chrysler will continue to offer low-rate financing deals in some regions of the country.

Others may follow Chrysler's lead
The all-rebate national promotion from Chrysler is scheduled to run through the end of June. If it does well, other automakers may follow Chrysler's lead.

"This is an industry where follow-the-leader is the rule rather than the exception," Eisenstein says.

It's not unusual for automakers to roll out incentives in early summer to drum up business. Come June, lots of people are contemplating vacation plans rather than a new set of wheels. Plus, with 2001 models set to roll out, prospective auto buyers may be tempted to hold out for newer models. Chrysler, for example, will be replacing one-third of U.S. sales volume with new models in the next couple of months.

How long the latest set of aggressive rebates lasts may depend on how well industry-wide auto sales, which dipped in May, rebound in June and July.

"If May was a temporary aberration, the big bubble of incentives may be over before they start. They may only last a month or two," Eisenstein says.

"If sales are really slowing down, consumers are going to see a lot more incentives in the coming months."

-- Posted: June 8, 2000