Temecula, Calif., resident Jerry Lan and his wife bought a Jeep Cherokee in April with a six-year loan that doesn’t require payments for three months.
Photo: Jerry LanAuto lenders are dangling easy financing terms to try to revive halted car sales.
The catch: Those terms are typically just for people with strong credit histories. Those at the other end of the spectrum are finding it harder to get loans.
Lenders are offering loans for new and used cars that let borrowers delay making payments for up to four months. They are providing record amounts of financing at 0% interest rates, sometimes for loans as long as seven years. Some 26% of loans for new cars purchased in April had 0% interest, compared with about 5% of new-car loans in March, according to car-shopping website Edmunds.
Those deals are going to consumers with ostensibly stable jobs and high credit scores. In some cases, they are buying a car not because they need it—many aren’t even driving to work at the moment—but because they want to upgrade.
In contrast, many companies that make car loans to drivers with lower credit scores are raising credit-score and income requirements and requiring bigger down payments.
Auto-financing terms are one sign of how the coronavirus pandemic is widening the gap between credit haves and have-nots. Some consumers are awash in financing offers from businesses desperate for customers. Others are finding it harder to get loans just when they most need them.
“Whenever there is a downturn, that is the first bucket to go in terms of risk—the people that are barely qualifying,” said Jessica Caldwell, an executive director at Edmunds.
Unsold vehicles sat on a lot near Philadelphia on April 28. Coronavirus shutdowns have caused foot traffic to car dealerships to plunge.
Photo: mark makela/ReutersThe generous financing offers are coming from credit unions and auto makers’ lending arms. Both types of lenders extend loans to borrowers who on average have high credit scores above 700, according to credit-reporting firm Experian PLC.
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The deals to skip payments sound like freebies but typically just delay the beginning of the loan. A 60-month loan advertising three skipped payments would start in the fourth month after the purchase and end in the 63rd month. Sometimes, interest can accrue during the months that payment isn’t required.
By some measures, the strategy is working. The number of consumers filling applications to connect with auto lenders, mostly for used cars, on LendingTree Inc.’s loan marketplace surged in mid-April after falling sharply in March. Credit-reporting firm TransUnion said this week it is beginning to see overall auto-loan volume rebound, partly because of the loan incentives.
Travis Lockhart, a database administrator in Boulder, Colo., and his wife, Marybeth Patrick, a freelance marketing consultant, decided they wanted to buy a car to replace their leased Hyundai Santa Fe.
They found a Mazda CX-9 on Carvana Co. ’s online car-retailing platform and had it shipped to their home, but after it arrived they decided to send it back and bought a 2017 BMW X5 instead. They signed up for a roughly $37,000 loan through Carvana’s financing arm.
Both times, they were offered the option of delaying the first three payments. They declined because they want to pay off the loan early.
Dealers say the generous financing deals are luring customers who had been thinking about buying but needed an extra push.
High-school science teacher Jerry Lan and his wife bought a new Jeep Cherokee in April with a six-year loan that doesn’t require payments for three months.
The couple, who live in Temecula, Calif., researched car sales after their neighbor bought two new cars and mentioned the deals he got.
“That made us start thinking maybe now’s the right time,” Mr. Lan said, “even though it’s crazy out there.”
A credit union financed the Lans’ loan. They negotiated their interest rate down, lowering their monthly payment from about $460 to $375.
Typically, customers who want to buy a car and need financing visit a dealership and submit a loan application. The dealership then sends the application to lenders that can decide whether to fund it. Until recently, car sales and lending were at record levels, partly because lenders had loosened terms for much of the past decade as vehicles becameincreasingly expensive.
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The coronavirus crisis brought that momentum to a sudden stop. Foot traffic at dealerships plunged, and many borrowers grew uncertain about their job prospects.
But dealerships and lenders alike are still eager to arrange and fund loans. Competiscan, a research firm, tracks the number of emailed solicitations touting auto loans that don’t require the borrower to start paying right away. Those solicitations more than doubled from mid-March through the end of April compared with the same period a year before, according to Competiscan.
The deals are being offered on a range of vehicles, including more expensive models. The financing arm of Hyundai Motor Co. is offering 0% interest, as well as loans that don’t start charging borrowers until four months down the road. Chrysler Capital is offering loans that let buyers delay payments for 90 days on certain Jeep, Dodge and Ram models, and Lexus Financial Services has similar offers.
Other lenders are pulling back, including Santander Consumer USA Holdings Inc. and Exeter Finance LLC, which have many customers with lower credit scores. Exeter, for example, told some dealers at the end of March that loan applicants would need to earn at least $3,000 a month to qualify, according to a notice sent by the company.
PNC Financial Services Group Inc. told dealers in March it would no longer accept loans to customers with credit scores below 660. It said in April that any loans made for more than 95% of the value of the car would be charged a higher interest rate.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Ben Eisen at ben.eisen@wsj.com
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