Mixed Blessing : Interest Rates a Dilemma for Car Dealers

It is a long way from Washington, where the Federal Reserve Board decided last Friday to slash interest rates, to the showroom at Nelson Honda in El Monte.

While economists applauded the Fed’s dramatic move to stimulate the economy, car salesman Michael Tudrick was keeping quiet on the subject Monday.

“I won’t bring it up unless the customer brings it up,” Tudrick said of last week’s one-point drop in the discount rate to 3.5%, which should lead to lower interest rates on most consumer loans.

The problem for Tudrick was that, as of Monday, Nelson Honda had not benefited from the discount-rate cut. Not one of the 15 lenders that provide car loans through the dealership had lowered their rates, and none are expected to until the end of the week--at the earliest.

Moreover, the dealership will not see its own interest costs on unsold cars fall until next month under the contract with its lenders.

The lag time between the cut in the discount rate and any reduction in auto-loan rates puts Nelson’s sales representatives in an awkward spot. While the lower rates will eventually lead to more sales, a customer might postpone a purchase until rates do indeed fall.

“The thing in the car (selling) business is to do things now,” Tudrick said.

The drop in the discount rate--the interest that the Fed charges on loans to commercial banks--sparked an immediate cut in the prime lending rate at many banks and is expected to save businesses and consumers billions of dollars on everything from car loans to mortgages to corporate credit lines.

But, as the experience of Nelson Honda illustrates, it takes time for such steps to trickle down to street level, and the result is not always exactly as economists predict.

The staff at Nelson Honda believes that lower interest rates--when they kick in--might be just the incentive to push customers across the sidelines and into the show room to complete a deal. “It might spur some people to make a decision that they haven’t made,” said Steven F. Nelson, whose father founded the dealership 31 years ago.

Like most car dealers, Nelson offers car loans through numerous lenders, and customers have the choice of obtaining their own source of financing. But neither lenders nor car dealers are obligated to pass along any of their savings from the lower rates.

Nelson, however, said that any rate reduction made by its lenders will be passed along in full to buyers. Currently, customers with an excellent credit history can expect to qualify for rates around 10% to 12% on a five-year loan from Nelson’s lenders. But the dealer is still waiting on Union Bank, its major source of car loans, and other lenders to lower their rates.

Lower rates also might allow lenders to loosen up their eligibility requirements, allowing more people to qualify for loans, said Murray Peisakoff, the dealership’s finance manager.

“The new car payments will be less because the interest rate will be less, so it will help,” said Peisakoff. “I expect to see an upturn in January because the rate decrease was so dramatic.”

Nelson Honda must also wait until January to get its own interest-rate break.

The dealer, which sells about 250 new and used cars a month, expects to save about $4,000 a month in the interest it must pay to finance its $4-million inventory of cars. But that rate changes only at the end of each month, under the agreement with Nelson’s banker.

General Manager Harlan Gittin says that lower interest rates will help his business. But he agrees with many of the experts who say that customers won’t return in droves until they feel more secure about their own future.

The rate cut, coupled with other good economic news, should help restore that sense of comfort and security, he said.

“What we are more worried about is people feeling comfortable with their jobs,” said Gittin. “As people start realizing that credit is easy, then people will realize that now is the time to do it.”

Interest rates were a major concern for customer Phil Silva, a 37-year-old truck driver from Diamond Bar. But in the end, it was a $2,000 price reduction that convinced Silva to buy a pearl blue Honda Prelude.

“They gave me an excellent price,” said Silva. “That’s why I called up the wife and said ‘I’m going to buy it.’ ”