CAR & DRIVER INCENTIVES, ZERO-PERCENT FINANCING HAVE AUTO DEALERS VYING FOR POLE POSITION AMONG BUYERS.

Byline: Barbara Correa Staff Writer

Despite months of relentless zero-percent financing, a zero down payment, and 90-day grace period promotions, many Southern Californians are still on the prowl for new cars and the best deals.

But they are confused about which deal is best - and what the long-term impact is when they sell.

``I've been selling real estate in Sierra Madre for 19 years, and I understand real estate financing very well,'' said Cathy Martins as she browsed for Land Rovers at Symes Automotive in Pasadena. ``But I've never been able to really understand auto financing.''

Despite the unprecedented deals and incentives car makers started offering after 9-11, the process of deciding whether to buy new, used or leased vehicles is still serpentine.

But there are some ways it's become simpler.

For starters, zero-percent and low-interest financing on new cars has made the decision between buying or leasing easier than it was before all the incentives started.

New-vehicle leases plummeted 40 percent in 2001, the Association of Consumer Vehicle Lessors reports, in large part because of such financing incentives.

That's because one of the big selling points of leasing is that it comes with a lower down payment and lower monthly payments than buying. But for a buyer interested in a model that can be financed for nothing, leasing gets less attractive.

Following 9-11 and the fear surrounding its economic fallout, the Big Three domestic car manufacturers, General Motors, Ford and Chrysler, led the launch of incentives to help restore consumer confidence right after the attacks. Car makers have continued the incentives to keep inventory moving.

The problem is, the sustained incentive campaign is suppressing the value of all cars sold. As these future value forecasts - called residuals - drop, leasing companies have to raise monthly payments to compensate, said Raj Sundaram, president of Automotive Leasing Guide, a residual data provider to the automotive industry based in Santa Barbara.

For example, to lease a Land Rover Freelander for 39 months, Cathy Martins said she was quoted a $3,000 down payment, and $299 a month for 36 months.

To buy the same car, Land Rover is offering zero percent financing for 60 months, which would put Martins' payments at a little over a $100 more a month, but in an extra two years she would own the car. By then, it would still be worth between $9,000 and $10,000, according to depreciation and residual calculators.

Buyer beware

For customers looking to buy a new car, manufacturer incentives have turned the auto market into a car enthusiast's candy store.

``It doesn't get any better than where it is,'' said Bob Kurilko, vice president of product development and marketing at Edmunds.com, a third- party automotive information company in Santa Monica.

The incentive war is really about competition among domestic manufacturers (top foreign makers like Toyota and Honda have participated to a lesser degree) and it has allowed consumers caught in the crossfire to walk away with the best deals in a generation.

However, buyers need to beware of getting so starry-eyed over the financing incentives that they forget to try to negotiate the price.

While financing charges are being cut by car companies, gross profits at some car dealerships are going up because incentives make some consumers less aggressive in trying to get a lower sales price, said Kurilko.

``The Ford F150 is selling for $700 more than before zero percent financing,'' he said. ``The GM Chevy Tahoe is selling for $1,300 more. What that's saying is that people are so thrilled with the financing deals they are forgetting to negotiate price.''

Kurilko advises customers to consider and negotiate the price of each element of the finance package separately.

Depreciation deals

While it's certainly a fantastic time to buy a new car, it's probably an even better time to buy a used - renamed pre-owned by dealers - automobile.

Buyers looking for used cars can't expect the financing deals being offered on new cars, but they get the indirect benefit of them. That's because people trading in their cars to buy a new one at zero percent have flooded the market with quality used cars, in turn driving down their value.

``The industry on average is subsidizing cars right now to the tune of $3,700,'' said Kurilko. ``When you subsidized new cars, it immediately drops the price of used cars.''

That translates into amazing deals, particularly for ``new'' used cars, a year or two old, said Ron Charron, part-owner of Boulevard Buick Pontiac GMC in Long Beach, where a 2001 Saturn SL2 sedan is listed at $9,874, compared with almost $15,000 for a new one.

At the same time, the depreciation of used-car values is coming back to haunt new-car buyers counting on high trade-in values, and a lot of people with outstanding car loans are discovering that their 2000 Honda Accord is worth less than they thought it was.

Dealerships call that the ``upside down'' effect, and it is epidemic right now.

How long can this free-for-all go on?

After a year-long buying binge brought on and sustained by the incentive wars, sales of new cars are beginning to cool, putting pressure on car companies to up the ante. The question is, what can they offer that they haven't already?

In September, month-to-month sales of new cars in the United States dropped about 5 percent and shed about 2 percent in October, according to Commerce Department figures. Part of that was pre-election uncertainty and seasonal weakness, industry watchers say, but there is no doubt the slowdown also signals that zero percent financing and hefty cash rebates may have reached saturation point in the market, leaving auto dealerships wondering what car makers will offer next.

``They'll come out with something new,'' said Fred King, a customer service executive at Hamer Toyota in Mission Hills, though he adds he has no idea what that could be.

Charlie Vogelheim, executive editor at automotive information company Kelley Blue Book, said he's heard discussions about ``captive'' financing companies - units of major car manufacturers - lowering credit requirements for incentive financing programs.

Kurilko of Edmunds said that up to now, zero financing offers have attracted better credit-risk customers (payments are higher) and that that has left captive finance companies like General Motors Acceptance Corp. in solid shape to now take on riskier loans.

David Jones, vice president of plans at GMAC, one of the largest financing companies in the world, said he couldn't comment on the company's future plans.

But in another sign that incentives are here to stay, Ford began offering six-year loans, with interest as low as 1.9 percent on certain 2002 models. The Federal Reserve's half a percentage point interest rate cut last month, to 1.25 percent, reinforces the likelihood that new incentives will be coming because lower rates make it cheaper for original equipment manufacturers to afford them.

Regardless of exactly what new incentives will appear in the next quarter, consumers still shopping for a car seem certain they'll be able to snag a good deal.

``It seems like every week, there's a new financing incentive,'' said Toya Anderson, a teacher in Los Angeles who's been looking for a new car to replace her 1992 Toyota Tercel. ``I figure as long as the economy's bad, and with Christmas coming, the incentives are going to be around.''

CAPTION(S):

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Photo:

(color) Many auto dealers are offering pocketbook-opening incentives. A zero-percent financing sign hovers above models at Saturn of the Valley in North Hills.

Michael Owen Baker/Staff Photographer

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Source: CNW Research

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