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The Number of 0-Percent Interest Loans Offered by Dealerships Is on the Decline

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As the Federal Reserve continues to raise interest rates, dealerships are choosing to offer fewer no-interest loans to new car buyers

The days of no interest on a new car are coming to a close

0-percent interest loans are one of the classic dealership methods to boost sales. With it, the customer need not worry about interest, while still spreading payments out over an extended period of time.

However, that all might soon be changing. The Wall Street Journal recently reported that the number of 0-percent interest auto loans offered by dealerships is on the decline.

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The number of new vehicles financed with an interest rate of less than 1 percent decreased by 5.3 percent during September. Compared to September of 2017, that represents an 8.2 percent decline. Currently, only 3.4 percent of new cars sold have a 0-percent interest loan attached.

Rising interest rates are a major reason why 0-percent loans are becoming more of a rarity. In the past 18 months, the Federal Reserve has raised interest rates more than five times.

These rising interest rates cause 0-percent interest loans to cost automakers more money. Evidently, the benefits of offering 0-percent financing deals are outweighed by the drawbacks of doing so.

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Currently, consumers are facing an average finance rate of 5.75 percent on a new car. Just a year ago, that average finance rate hovered right around 4.82 percent.

Consumers are also opting for longer financing periods for their vehicles. While this can lower their monthly payments, it may end up costing them more money in the long run, especially with 0-percent interest rates becoming less common.

During the aftermath of the recession, many dealerships relied upon 0-percent financing to secure sales. With the economy currently in a rather healthy state, those same dealerships may now need to rely on other methods to secure new car sales.

News Sources: The Wall Street Journal (subscription required), GM Authority