As Auto Deals Add Up, Will Buyers Bite?

A fast-growing package of incentives is slashing the prices of GM, Ford, and Chrysler vehicles. But wary would-be buyers still may not take the bait

By John Tozzi

Jonathan Ezor wasn't really in the market for a new car until yesterday. When the 42-year-old father of three read about Ford's (F) new 0% financing plan, the offer was enough to make him call a dealer. Ezor, a professor and lawyer in West Hempstead, N.Y., says he and his wife had talked about replacing their 2003 Ford Windstar minivan, which is showing its age despite having only 40,000 miles, but "it didn't seem to make economic sense." With interest-free financing, however, he puts the odds of them buying a new Taurus X in the next two months at 50-50.

With the U.S. auto industry in turmoil, Ezor and thousands of other would-be buyers find themselves in a transformed landscape. Manufacturers, dealers, and the Obama Administration are throwing incentives at reluctant buyers to help revive foundering auto sales, which in February were down 41% from the prior year. The latest come-on to buyers includes "payment protection" plans announced by General Motors (GM) and Ford on Mar. 31. The basics: Lose your job and the automakers will pick up your car payments for between 9 and 12 months while you're out of work. The proposals echo the "assurance program" Hyundai rolled out in January: three-month payment protection with the option for people who lose their jobs to return cars within a year. The automaker says it has bolstered sales.

The new incentives come a day after the Obama Administration took a hard line with GM and Chrysler—the domestic automakers that have received federal bailout money—heightening doubts about their respective futures. GM has been given 60 days to come up with a viable plan for proceeding or it will likely end up in Chapter 11 bankruptcy. Chrysler has been given a month to work out a pending alliance with Italy's Fiat (FIA.MI) or be forced into a possibly fatal bankruptcy. While Washington's tough love may ultimately turn out to be the medicine the automakers need, it offers both opportunity and risk for prospective car buyers.

New Cars May Underprice Used Models

The carmakers and Washington are offering an unparalleled package of inducements that could sway reluctant buyers to return to showrooms. Payment protection and 0% financing (already announced by Chrysler in January) are being sweetened with a federal tax deduction for sales taxes paid on new cars and by the Obama Administration's plan to back the warranties for GM and Chrysler buyers, even if those companies go bankrupt. Obama further signaled his support for a proposed "cash for clunkers" law that could give buyers who trade in older, less fuel-efficient cars $3,000 to $5,000 to buy new models.

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