Zero percent financing has recently crept back into the auto finance world, with Ford Motor Credit Co. re-offering the subvention loans to select consumers. Also, Mitsubishi Motor Credit of America (MMCA) is offering consumers a new zero interest package with no payments for up to one year.

Credited with boosting auto sales in the fourth quarter of 2001, the move on Ford's part is to regain declining market share. Ford is currently the number-two auto maker in the U.S. Mitsubishi, however, has long offered incentive loans, but this represents the first time the captive has offered no interest for the life of the loan.

Mitsubishi's zero down/zero payments/zero interest for up to 15 month loans have been offered since January of 2000 and the issuer's ABS transactions have priced at a discount to comparable prime auto loan transactions, as investors are weary of buying bonds backed by loans that have no payment history during the first year. After two years of collateral performance, however, Mitsubishi saw more favorable spreads for its most recent offering on June 12.

While these subvened loans are made to the highest credit quality consumer - which boosts average Fico scores in a pool - the rise in new car purchases increases prepayment speeds in auto loan ABS, and potentially floods the used car market down the line.

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