Megan McArdle Is Confused About 0 Percent Financing, Among Other Things
By Matthew DeBord
Posted Thursday, March 4, 2010 - 4:48pm
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The Atlantic’s mighty econoblogger, Megan McArdle, is perturbed by Toyota’s (TM) decision to roll out 0 percent financing:
Zero-percent financing is the last resort of a desperate car company. Financing has historically been a lucrative sideline for automakers (the last few years notwithstanding); indeed, Ford and GM were frequently described as banks with a sideline in manufacturing. That was a pretty accurate reflection of where they were making their money—and an explanation of why they stopped, when debt markets when haywire.
She’s right about financing being lucrative. GMAC was arguably the crown jewel of General Motors’ whole operation, before GM was compelled to sell half of it in 2006. However, GM and Ford (F) didn’t stop making money when the debt markets seized up in 2008-09. Both carmakers had stopped making money long before that. In fact, they each quit turning profits in 2005, when the credit markets were functioning just fine.
And she can’t resist taking a whack at GM and Chrysler, the bailout brothers:
Anyone who thought that the Big Three were finally getting a break when the chairman of Toyota was hauled in front of a congressional committee again. Zero-percent financing for five years [Note: Loans can be structured to last this long, but 0 percent financing usually involves shorter terms, on the order of 36 months] is going to make it very difficult for GM to return to profitability—and presumably Chrysler will be forced to follow suit. These companies are going to be on taxpayer life support for quite some time.
First off, 0 percent financing doesn’t mean that everyone with a credit score and a pulse who walks into a Chevy dealership is going to qualify for the nil terms. The incentive is for customers with “good” credit, which could mean anything from a 650 to 750 score. If you can get 0 percent terms, you’re likely to be a reliable source of cash flow. A carmaker’s captive lending arm may not make a decent profit on your loan, but at least the company can satisfy its accountants on the manufacturing end, by moving some iron.
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Submitted by texpat76 on Sat, 03/06/2010 - 10:43am.
Surprise
Shocked, actually. Megan McArdle is confused about something. Critical thinking is beyond her capability and/or willingness. She accepts the assumptions and arguments of equalibrium-seeking economic thought hook, line, and seeker.
If she represents the best and brightest that the Atlantic has to offer, then I need to cancel my subscriptions. She is truly a product of our time; a well credential, intellectual lightweight.
Submitted by rfmagic on Thu, 03/04/2010 - 6:25pm.
qualifying for 0 %
I'm someone who buys new cars, hangs on to them for >10 years and partially finances them. It would be pretty dumb of me to get a 0% loan, because any dealer worth his salt would try to sell me the thing at close to msrp to make it worth their while to give 0% financing. Calculating simple interest is not rocket science. I haggle armed with knowledge from sites like Edmunds and dealer incentives till I get a good price, pay 30 to 50% down and payoff my loan early. The 0% deal is a chimera, they're going to get you somewhere. The smart thing to do would be to pay cash, unless you are sure that you can get a better return elsewhere than the interest rate that they're charging you. Thanks to Uncles Ben and Timmy, that rate is fairly low ;-) I'd say that the people who would qualify for a 0% loan would probably share my outlook.
