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Low Financing Rates Bode Well for US Automobile Industry

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Low financing rates

We’ve already seen how the job market is improving. We’ve seen how the increase in the U.S. Consumer Confidence Index is supporting future vehicle sales. When consumers buy vehicles, they typically look at the total cost of ownership. This includes vehicle cost, disposal value, and financing cost.

More than 85% of new car purchases are financed. Financing cost is therefore a key metric that investors in automobile companies like Toyota Motors (TM) and Honda Motors (HMC) should track.

Tesla Motors (TSLA), the leading manufacturer of electric cars, could be an alternate play in the automobile industry.

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Financing costs are stable

The above chart shows the average rate on a new auto loan for a term of 60 months. The data are compiled by Bankrate. As you can see, interest rates have been quite stable in 2015. Automobile loan rates have been hovering around the 3% mark for quite some time. However, investors should keep a close eye on the Fed’s monetary stance. Any increase in the benchmark rate by the Fed would be negative for the automobile industry.

Multiplier effect

Low financing rates support vehicle sales. Higher vehicle sales are positive for the broader US (IVV) (SPY) economy, given its multiplier effect.

The multiplier effect is the incremental impact of each dollar spent as it works its way through the economy. For example, an alternator is purchased from a supplier that must purchase labor, copper, steel, coated wire, and related services to support the business. The automobile sector is a major end user of steel, aluminum, and copper.

Since automobile companies have their operations on a global scale, investors should watch global indicators. In the next part, we’ll look at how vehicle demand is shaping up in Europe.

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