The Big 3 are offering big customer cash incentives to prop up their captive finance companies.
General Motors, Ford Motor Co. and the Chrysler group are paying bonuses of $500 to $1,500 to U.S. buyers who finance vehicle purchases through captive lenders. The bonuses are in addition to other incentives.
The domestic automakers want to use the rebates to reverse their captive lenders' loss of market share to banks and credit unions in the past three years. They also seek to boost buyer loyalty to the factories and finance companies and to attract high-grade credit customers who will provide repeat business.
Officials of captive companies and dealers say the Big 3 are betting that such gains will offset the cost of the finance incentives.
The GM and Ford bonuses vary by region and model. The Chrysler group pays an average bonus of $1,000 on most models nationally. The Big 3 have paid the bonuses through the captive lenders for the past few months.
Typically, customers must choose between automakers' cash rebates and low-rate or 0 percent financing. The lower the rate, the better a buyer's credit must be to qualify.
When other lenders offer loan rates comparable to the captive companies' rates, buyers tend to choose the factory rebate. That has caused the captive lenders' share of the U.S. vehicle financing market to drop.
The finance companies often keep domestic automakers profitable. While GM's auto business posted a loss of $130 million during the third quarter, General Motors Acceptance Corp. earned $656 million. Ford Motor's automotive operation had a quarterly pretax loss of $673 million, but its financial services business reported $1.43 billion in pretax profits.
Although the Big 3 must spend more to offer the finance bonuses, the tactic pays off in overall profits, a source says.
For example, offering a $1,000 finance bonus in addition to a $3,000 rebate allows an automaker to advertise incentives of as much as $4,000. But because about one-half of buyers finance with a captive lender, the actual cost to the company is closer to $3,500. The margin on the finance deal more than covers the additional $500 cost, the source says.
"Finance penetration declines in a high-cash-rebate environment," says Kelly Mankin, vice president of Chrysler brands marketing for DaimlerChrysler Services North America. "Banks and credit unions can be more aggressive on price because their cost structure is lower than ours."
Bonus money tied to captive financing is reversing the declines, Mankin says. He did not provide U.S. figures for the Chrysler group.
Several Chrysler group, Ford and GM dealers say the bonuses have caused a surge of customers who get loans through Big 3 captive lenders.
Ford Motor Credit Co. financed 55 percent of new Ford, Lincoln and Mercury vehicles sold in the United States from July through September. That compares with 48 percent in the third quarter of 2003, says Melinda Wilson, a Ford Credit spokeswoman.
GMAC financed 45 percent of new GM vehicles sold in North America in 2003, down from 52 percent in 2001. That share continued to fall this year until GM introduced finance bonuses in August, says GM spokeswoman Deborah Silverman.
"The GMAC cash allowance has been a successful program for us," Silverman says. She did not provide figures for 2004.
Comparable U.S. figures for DaimlerChrysler Services are not available. But Mankin says the bonuses have helped the captive lender book more than a million contracts this year. That's just the second time in the company's history it achieved that volume in a 12-month period or less.
The bonus program attracts customers with good credit histories, Mankin adds.
And buyers who finance through DaimlerChrysler Services, he says, are 35 percent to 40 percent more likely to return to the same dealer to buy another Chrysler group vehicle than those who finance through other lenders.
Dealers acknowledge some customers finance their loans through the captive companies to get the bonus, but then refinance their loans or pay cash.
There are no penalties for doing so. The captive lenders won't say how long the cash bonuses will stay in effect. But in a market in which incentives change rapidly, the bonuses continue to boost the companies' finance volumes.
Says Mankin: "This incentive has staying power."
Staff Reporter Amy Wilson contributed to this report
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