The interest rates charged on auto loans originated by General Motors, Ford, and Chrysler had their largest one-month drop in February since the Federal Reserve started tracking the data point nearly four decades ago.
The average interest rate on a Big Three car loan was 3.17% in February, down from 8.23% in March. The data was included in the Fed’s monthly release of consumer credit outstanding in the U.S.
The 61% drop was even larger than the falloff following the 9/11 terrorist attacks, when the average interest rate fell 53%.
In comparison, the average interest rate on a 48-month new-car loan at financial institutions was 6.92%, down 1.9% from November, which was the last time the Fed released that specific data point.
Such a precipitous drop on its interest rates is further proof of the lengths the Big Three are going to as what may be a last-ditch effort to preserve their operations. The Big Three had not averaged an interest rate this low since the fall of 2006.
TINSTAAFL -There is no such thing as a free lunch- The subvention is built into the car price. Many un-educated car buyers can be persuaded to buy a car by rationalizing that the interest rate is “so cheap”. The car manufacturers believe that they will sell more cars with this hype than if they dropped the MSRP by a similar amount because the MSRP drop would require an assumption about the length of term of refinance. Of interest to banks is the average “term” financed associated with that average interest rate to see if the three captives believe their cost of money is cheaper than the banks cost of money for similar terms.