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GM Daewoo lends at -1% interest

By James Mackintosh in Detroit
Published: January 6 2004 22:32 | Last Updated: January 6 2004 22:32

GM Daewoo has begun offering car loans with a negative interest rate in Korea as the US-owned automobile manufacturer ramps up its assault on Hyundai, the market leader.

The offer is thought to be the first time borrowers have been paid by their lender for taking on debt, something financial economists have long tried to find a way of achieving.

"We thought it was a really nice idea," said Nick Reilly, the British chief executive of Daewoo. "We like to do things that are a little bit different and innovative."

Under the deal, buyers who take out a loan to buy a new Daewoo will have a rate of -1 per cent, meaning they get paid each month for holding the debt.

But Roger Bootle, managing director of Capital Economics in London, said Daewoo's approach looked like a marketing gimmick rather than true negative rates.

He pointed out that banks and finance houses would always be better off lending to the central bank at zero per cent than to consumers at a negative rate.

"Why would you lend to Joe Bloggs at a negative rate when you can lend to the central bank at zero?" he said. "I can't imagine this is anything other than a marketing gimmick: equivalent to a cashback."

Daewoo was the first to offer zero per cent finance in Korea, shortly after GM took control more than a year ago.

Since then a cash crunch at many Korean finance houses, combined with a slow car market, has prompted carmakers to push special finance deals as a way of attracting buyers.

Mr Reilly said the price war in Korea was now close to US levels, with the value of incentives - including special financing deals - running at 7-8 per cent of car sale value. Until recently it was at just 2-3 per cent.

The company has tried a series of innovative marketing approaches in an attempt to rebuild the brand, which was badly damaged by its slide into bankruptcy. GM bought control of the company from its creditors in 2002.

Special offers included a one-year "test drive" for 1,000 winners of a lottery, which attracted 630,000 entrants.

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