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Your Money > Autos
Buyers getting more car for the money
Rich auto incentives spur 'more car' in one's garage rather than more money in one's pockets.
July 29, 2003: 4:26 PM EDT
By Chris Isidore, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Car buyers are taking the thousands in cash-back offers and savings from zero-interest financing and using that money to buy more car rather than putting the savings back in their wallets.

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No money down, zero percent interest is good news for consumers and bad news for carmakers. CNNfn's Bill Tucker takes a look at the auto industry.

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Industrywide net vehicle prices -- the price of comparably equipped vehicles minus the cost of incentives -- have been declining by about 1-to-2 percent for the last few years, according to stats from industry leader General Motors Corp. (GM: Research, Estimates). But the average price paid per vehicle has actually been climbing, up about 4 percent over the last two years, according to data from the Power Informational Network, an affiliate of J.D. Power and Associates.

"Even with the lower net pricing, the transaction price is creeping up in the broad sense," said Tom Libby, director of industry analysis with the Power Information Network. "There is movement (by buyers) from one segment to another. And the brands have added new models, and those new models are priced in the upper range of the brand."

For example Ford Motor Co. (F: Research, Estimates) told investors that net pricing was down 2.7 percent for Ford, Lincoln and Mercury brands in the second quarter, due greatly to higher incentive costs. But the average transaction price was up 2.4 percent to a record $21,120, due to a richer mix of vehicles and options purchased by Ford buyers.

"People that are buying are using some of the incentives in the same way they're using the interest rates on mortgages," said George Pipas, manager of sales analysis for Ford. "There, they're buying more home or financing renovations. Here, they're buy more features on cars, or buying the next class up in cars."

Pipas and other auto executives say that the incentives are one of the reasons that, while overall U.S. auto sales are off 3 percent during the first six months of this year compared with a year earlier, the sales of the premium auto brands are up 9 percent during the same time.

"Today premium branded products account for 11 percent of new vehicle sales," said Pipas. "In '96 they accounted for 6 percent of the market."

The desire of car shoppers to go home with more car rather than more money in their pocket is one that helps the automakers afford incentives that have now reached an average of $2,670 per vehicle.

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"It varies by category, but it's a significant offset in many cases," said Paul Ballew, GM's executive director for market and industry analysis.

Buyers aren't just going home in a higher class of vehicle. They're also are going home in the same cars but with more options.

For example, average transaction prices for GM's Cavalier economy car have dropped only four percent during the last two years. Over the same time span, the average transaction price of the base model dropped six percent, and those of the higher-end Cavaliers have dropped between six and seven percent. That's possible because today about 40 percent of Cavalier buyers are buying the more expensive models with more expensive option packages, where only 23 percent bought the pricier models two years ago. So, even as the transaction prices for those more expensive models are dropping, they're still helping to hold up transaction prices for Cavaliers overall.

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"We've seen quite a bit of that 'richening,' even with low (priced) cars," said Ballew. "If you look at vehicles now, it's not unusual for small cars to have stackable CD changers or satellite. It's quite a change from old beer-can-on-wheels day when the least expensive cars had no options -- no air, not even an automatic transmission."  Top of page

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