Big Three's low-interest auto financing is undercutting banks

Fierce competition for the American new car buyer has forced the big automakers to rely on financial incentives to lure customers into their showrooms. While rebates and low interest loans may boost sales and save money for consumers, they pose a threat to banks and other lending institutions. During the last recession, the rebate was the favored sales gimmick of Detroit's carmakers. In the last year, the low-interest loan has come into favor, since the Big Three can borrow money relatively cheaply through their captive finance subsidiaries and spread the cost over several years. They are now offering interest rates as low as 5.8 percent under certain conditions, and most of the new domestic cars can be obtained with rates of 10 percent or less.

That compares with finance charges of 11 percent to 12.5 percent at the typical bank, savings-and-loan, or credit union.

Making matters worse, General Motors, Ford, and Chrysler have each designated that all these so-called ``subvented'' loans be processed through their individual captive finance subsidiaries, even where dealers have traditionally turned to local lenders.

That translates into ``a lot of lost loans,'' says Milton Riseman, chairman of Citicorp Acceptance Corporation of St. Louis. Mr. Riseman met with several hundred financiers in Dearborn, Mich., recently for a banking industry conference on ways to loosen the grip of General Motors Acceptance Corporation and the other auto industry finance subsidiaries.

As the in-house financier for the nation's largest carmaker, GMAC has in turn become the nation's largest auto lender, but recent figures show an unprecedented spurt of growth. During the first quarter of 1985, before beginning its subvention programs, it processed loans for 28 percent of all cars bought from GM dealers. During the same three months this year, that figure ballooned to 53 percent. Last September, when the automaker announced a 7.7 percent interest rate -- an unheard of figure at the time -- the processing rate temporarily rocketed to a record high 70 percent of all GM purchases.

Virtually identical gains have been reported by the Ford Motor Credit and Chrysler Financial Corporations.

``We're simply unable to compete,'' notes Jack Shipman, executive vice-president of Liberty National Bank, in Louisville, Ky. ``When you're buying money at 6 percent and trying to sell it just above that rate, it doesn't make auto financing very viable.''

Some banks have been experimenting with ``balloon'' loans, with which borrowers are offered relatively modest monthly payments for several years, then have the choice of either paying a large portion of the car's sticker price as a final payment or simply turning in the car, as if it were leased. At the National Bank of Detroit, for example, an $11,000 car bought on a 48-month balloon note at 12.5 percent with 10 percent down payment yields a monthly note of only $196.26. That's about a third less each month than a conventional loan and about the same as it would cost buying a car through one of the Big Three incentive programs.

The automakers are not sitting back, however. GMAC is launching its own national balloon loans -- again with discounted rates. And Ford Motor Credit and Chrysler Financial are expected to follow suit.

At the same time, the carmakers' subsidiaries are not content to seek dominance merely in auto loans. Over the past year, they have each made several acquisitions in other financial service arenas.

Ford Motor now owns First Nationwide, a California-based savings-and-loan, and Ford Motor Credit is aggressively seeking to expand into other states by purchasing troubled S&Ls.

Chrysler Credit recently acquired the inventory financing division of Westinghouse Credit, and along with several other acquisitions made in 1985 it hopes to become active in retail and commercial lending.

But to many bankers, the biggest threat comes from GMAC. The lender's diversification program got off to a fast start last year with the acquisition of both Norwest Mortgage Inc. and the Colonial Group of mortgage banking and servicing companies. Those additions immediately turned the GM subsidiary into the nation's second-largest mortgage lender, with about 70 offices and $22 billion in mortgages, covering 357,000 customers.

Now, in an experimental mortgage program, GMAC is offering mortgages to GM employees and retirees in Michigan, and this summer it will ``go public,'' offering home loans to all state residents. If even 5 percent of GMAC's customers take out mortgages with the company, it will double the subsidiary's huge mortgage business -- and give banks and other traditional lenders even more cause for concern.