As car loan defaults surge, Ford offers 72 month 0% financing
At a time when car finance defaults, blamed partly on long loan repayment programmes, are rocketing, Ford has chosen to offer a 0% annual percentage rate (APR) for 72 months across its entire model line in the US; it is presumed this is to clear out 2016 models. As Bloomberg warned earlier this year, while many who finance cars for a long period of time do not fall in the subprime category, there are enough that do, thereby making these loans dangerous for the companies that fund them. And though the Ford deal is extremely attractive, there is uncertainty on how many of the borrowers will actually end up paying the entire balance. 

Ford Offers 72 Month 0% Financing as Car Loan Defaults Surge

Ford Motor Co. (NYSE: F) offers a 0% annual percentage rate (APR) for six years (72 months) across its entire model line, presumably to clear out 2016 models. The deals come at a time when car finance defaults, blamed to some extent on long loan repayment programs, have skyrocketed. Ford has taken on at least some degree of trouble because of the trends.

The “Ford Freedom” sales event requires buyers to use Ford Credit APR financing. Ford Credit is part of Ford. That means it takes on either the benefit or problems with the loans.

To put the loans in perspective, they will be paid through 2022. According to Carfax:

Don’t be fooled into thinking depreciation slows much after the first year. The fact is, new cars continue to lose value for four more years, averaging a decline of 15-25 percent per year. On average, a new car will lose 60 percent of its total value over the first five years of its life.

For some buyers, the final year or two of six years financing are ones when the sale of the car likely will not cover the balance of the car loan. While not a perfect comparison, the problem is not unlike an underwater mortgage.

While many people who finance cars for long period do not fall into the subprime category, enough do to make these loans dangerous for the companies that fund them. According to Bloomberg:

Rising delinquencies come as a warning sign that more loans may end up in default down the road, said John McElravey, an analyst at the bank (Wells Fargo). What may be most troubling, however, is that the default rate is already climbing, up to 12.3 percent in January from 11.3 the prior month. That is the highest rate since 2010, the data show. Securities backed by auto loans are structured to absorb a portion of anticipated defaults, but concerns have mounted over the last year that cumulative losses on auto loan securitizations may end up exceeding initial estimates, thanks to declining underwriting standards.

While car credit companies clearly do not want to lose money, there is an extent to which they cannot avoid it with some of their customers.

The Ford 0% APR financing for 72 months is extremely attractive. One question about it is how many of the borrowers will pay the entire balance.