An Auto Finance Spin on a Retail Credit Staple

I don’t listen to the radio much, but the last two times I’ve turned it on while driving, I’ve heard the same infomercial.

The commercial aims to get people to buy into a financial management system that helps them pay off their mortgages faster and to save more money. There’s nothing terribly special or noteworthy about this particular commercial; I’m sure there are dozens, if not hundreds, of others like it bouncing across the airwaves.

While I have no plans to purchase the system, I can say that it’s effective because I remember one key stat: the amount of interest that people pay over the life of their mortgages is staggering.

The auto finance industry didn’t invent 0% financing, but it did make it very popular for a while nearly a decade ago. Most manufacturers and captives had a 0% program in some form or another. Why not bring it back, in a manner of speaking?

Many retailers offer no-interest financing on purchased items, if the amount financed is paid off within a certain period of time. If the amount is not paid off in full, the the interest accrued for the total amount is added to the balance. Why shouldn’t auto finance companies make the same offer?

It’s a lot more financially appealing to the lenders than a straight-up 0% financing program because there are a percentage of car buyers who aren’t going to repay the balance in time and will have to make the interest payment. The term will have to be long enough to give customers a reasonable period of time to repay the loan — at least three years and probably more like four or five to be fair. As well, having a 0% loan paid off sooner is better for lenders than stringing out a no-interest loan for six or seven years.

There is the potential to cause some financial stress to borrowers unable to pay off the balance in time, prompting them to be hit with the accrued interest. But I’m sure there can be some payment arrangements made on that to make it less likely that borrowers default and force a repossession.

Lenders can promote how they are making cars more affordable, and giving people the chance to buy cars for less money.

And maybe they can replace that silly infomercial with ads about their new loan programs.

Everybody wins.