The zero effect

Associated Press

MINNEAPOLIS — As interest rates as low as zero percent spur a surge in new car sales, used car lots are filling up fast and values are plummeting.

New cars sold at record levels last month as shoppers rushed to take advantage of special financing offers from Ford, General Motors, Chrysler and a few other automakers. Many of those buyers traded in existing cars and trucks, creating a glut that will take months for used car dealers to unload.

Dealers say used car sales are steady but haven’t kept pace with the growing supply. Some dealers plan promotions on used cars after the no-interest offers for new cars expire later this month. Already, interest rates for used cars are near historic lows, averaging 9.3 percent nationally for a 36-month loan, according to online service Bankrate.com.

As trade-in volume increased last month, dealers began paying less. Many consumers considered the no-interest financing more important than obtaining a high price for their trade-ins.

Some didn’t even ask for a trade-in arrangement.

"We realized if we told the dealer we had a trade-in, they were going to lowball us right off the bat," said Scott Pendlebury of Richmond, Va. He and his wife sold their 1992 Buick on their own after buying a new Mercury Sable in a zero-percent deal.

Making a deal on a used vehicle is tricky for both consumers and dealers because the vehicle is always depreciating. The rate of decline varies depending on economic conditions and supply and demand for that model of vehicle.

Data through August from the National Automobile Dealers Association, which publishes a monthly guide to used vehicle values, showed the annual depreciation rate rose to about 15 percent this year from 13 percent last year. The increase is partly credited to strong sales of new vehicles in 1999 and 2000, some of which are starting to show up in the used car market.

In another sign of a softening used car market, an index of used car prices by Manheim Auctions has fallen most of the year. On Wednesday, Manheim said the index fell in October at its fastest rate of the year, dropping to 110.4 from 112.1 in September.

Dealers over the past decade have relied more heavily on auctions to balance their used car inventories. But so many used cars came into dealers in recent weeks that they’re now having trouble disposing of the surplus at auctions.

"If we’ve got a used car that’s questionable, we’re just dumping it" at an auction, said Paul Walser, who owns several dealerships in the Minneapolis area. However, he added, "what we’ve heard is there’s a lot of no-sale activity at the auction."

Some dealers have kept used car inventories in line by steering buyers who couldn’t afford new cars over to used models.