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Banks Struggle to Beat Zero Percent

June 30, 2003

Since the Sept. 11 attacks in 2001, car companies have unleashed one incentive after another, from zero percent loans to $3,500 cash rebates. The deals have galvanized the auto market but have left banks and credit unions

scrambling for customers, according to the Charlotte Observer.

The Observer reported that in the past year and a half, banks and credit unions together have lost more than 3 percent in market share to the automakers' finance arms -- or "captive finance companies," as the industry calls them.

The friction stems from the carmakers' and the financial institutions' differing goals, according to the Observer. The primary aim of auto companies is to keep their factories running and the cars moving off the

lot. So their subsidiaries will finance a loan even if they don't make money on the loan itself.

Banks and credit unions, however, are in the

business of making money on auto loans. And zero percent makes no sense to them, the Observer said. Banks have dropped car loan rates on average to a 7.5 percent

annual percentage rate, and they are going after customers whose credit history does not qualify them for zero percent financing or who want the cash rebates, according to the Observer.

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