“Zero zero” financing – the automobile industry’s reaction to the potential drop off in car sales following September 11th – turned a lot of heads in the credit union community this fall. After all, auto loans are the bread and butter of most credit unions’ lending programs, so to have their members opt for seemingly better terms at the local car dealership did not sit well with many credit union managers. The media blitz on zero percent financing started on September 20, when GM announced its “Keep America Rolling” program. Ford soon announced its “Ford Drives America” program, with other manufactures jumping on the bandwagon. These programs were augmented by cash rebates and lease incentives. Some in the credit union community cried foul, suggesting that these “zero zero” deals may violate the law. In the past, challenges to zero zero financing have not been successful. We believe the best way to combat zero percent financing is through aggressive member education. In fact, in today’s competitive marketplace, barring some unforeseen legislative or regulatory change, we believe it is the most prudent choice for credit unions. NAFCU has provided its members with free marketing materials to help educate consumers on the pitfalls of zero percent deals. These materials proved to be our most popular download in the month of November, with nearly 4,000 downloads of educational material on “zero zero” automobile financing. Credit unions turned that material into statement stuffers, newsletter articles or simply posted it on their Web sites. The material can be downloaded at http://www.nafcunet.org/Zero_financing/Zero_Financing.html. One of the ironies of the zero zero programs has been the mammoth positive impact they’ve had on short-term consumer spending. Zero percent auto financing was the most important component of a record 2.9% increase in consumer spending for October. Another contribution of these programs has been to get the American consumer back on their feet following September 11. We also need to recognize that U.S. automobile manufacturers are a vital part of our industrial base and the economy as a whole. An American-made automobile has always reflected (for better or for worse) our collective workmanship and manufacturing quality. And when it comes to marketing and advertising, the car companies are quite simply behemoths. Of the projected $239 billion that will be spent on U.S. advertising in 2002, fully 11%(over $26 billion) will come from the auto sector alone. In other words, automobile manufacturers spend for advertising almost half the amount of new car loans that federally insured credit unions have on their books! The fatal element of zero percent financing is that it is not sustainable. While interest free loans pushed sales this fall to an estimated near all-time high, profits continue to sag. Interest-free loans will not have a remedial effect on current industry-wide problems: recession, worldwide overcapacity, the weak yen and environmental concerns. Of course, for the consumer and credit union member, the downside of zero percent financing is that it may not be the best strategy or, in fact, it may not be available. Obviously, this is where education comes in. The low rates being advertised by auto manufacturers may only be available to individuals with a good credit history. For example, if you go to Ford’s Web site, you’ll find in all capital letters: “NOT ALL BUYERS QUALIFY FOR THE LOWEST APR OR LOWEST RED CARPET LEASE PAYMENT.” Another component of these programs is that the low rates may only come with short-term loans, usually up to 36 months. In addition, the consumer loses the opportunity for rebates or other incentives if they go with the zero-zero financing. And perhaps most important for many is that zero financing is not available for popular models. These might include a Honda Odyssey, a Chrysler PT Cruiser, Ford Thunderbird, some sporty coupe or high-demand luxury automobile. Each time automakers have extended zero percent financing, the deal is not as good, or there are more restrictions. For instance, GM’s most recent offer excludes Cadillacs, Corvettes and two Saturn models. Other questions come in to play: What will be the total cost of the loan? Will you be charged an application fee? Is there a pre-payment penalty? Would you be required to pay off more of the interest earlier in the loan (front loaded interest)? A consumer may carry a larger principal balance longer, meaning at some point the value of the car could be less than the balance of the loan. When you come down to it, most people look at the monthly payments and stick with a number that meets their budget and closes the deal. However, with multiple incentives, consumers must be encouraged to do the math. Often, when the math is done, it is the credit union loan that makes the most sense for the member. The key, then, is to educate credit union members to be savvy buyers. This is why NAFCU developed the material on its Web site and made it available to every credit union in the nation. The best strategy for the member is to check with the credit union first. More often than not, the advantages of a credit union loan will outshine the “deals” offered by other lenders – even so-called zero zero loans.

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