Those no-interest car loans could be killing the economy.

Commentary about business and finance.
Sept. 9 2002 11:52 AM

Money for Nothing?

Those no-interest car loans could be killing the economy.

(Continued from Page 1)

The financing moves may also be cutting into the profits of other companies that have nothing to do with the auto industry. With zero-percent financing and low mortgage rates, American consumers in the past 12 months have shown an immense appetite for buying new cars and homes, even as unemployment rises. While our capacity for debt is seemingly endless—as a nation, consumers owe $1.7 trillion—all the money spent on cars and homes may represent cash not flowing into sectors of the economy where credit doesn't come on such easy terms.

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The retail sector, in particular, is suffering. The back-to-school season has been a bust for many large retailers: At Wal-Mart, same-store sales in August rose a disappointing 3.8 percent, far below the expected increase of 4 percent to 6 percent. In recent weeks, analysts have blamed carmakers rather than the slack economy for disappointing results everywhere from Sears to Circuit City. In an effort to generate customer interest, some electronics chains have even begun offering their own zero-percent financing. But the free loans are far more damaging to such chains, which are used to charging double-digit interest rates.

Still, for an automaker like GM, the PR value of zero-percent financing may be worth the financial cost. Selling cars is a heavily promotional business. Customers rarely pay the sticker price and frequently choose from a range of inducements that may include extra features, rebates, delayed payments, or reduced financing terms. GM and other automakers may not have boosted their earnings per share or stock prices significantly through these moves. But by simplifying the terms, and couching the inducements in patriotic language and imagery, they have made a common business practice look like a selfless contribution to the common welfare.

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