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Fed Funds Rate Declines Will Help Industry

January 29, 2008

With interest rates on new- and used-vehicle loans moving in tandem with the Federal Fund Rate, Power Information Network reported in January that the automotive industry could see lower APRs as the Federal Reserve Bank remains active.

The non-captive rates tend to be more strongly correlated with the Fed rate than the captive rates, since the latter are subject to various incentive interventions by their operating companies to prop up consumer demand. Therefore, as the Fed rate declines, the non-captives may see more of a direct decline than the captives, putting the captives at a disadvantage. This may spur the captives to offer additional incentives to retain their share.

Overall, the lower rates charged by all finance sources will increase consumer demand and provide a spark for the industry, assuming everything else remains the same.

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