You’ve heard the commercials promoting zero percent financing. The idea is that you can finance a new car and pay no interest over the life of the loan. Does zero percent financing sound too good to be true? It may be. Let’s talk about what it is, how it works and if you should take advantage of it.
What is zero percent interest?
When you take out a car loan, you’re borrowing money to pay for the car, so the lender is charging you interest on that loan for the opportunity to use their money, for a limited time. Basically, zero percent interest lets you pay the same amount of money as a cash buyer, even though you’re spreading your payments over a longer term.
Sometimes the 0% is available for a limited time and then after the promotional period, the balance must be paid at a much higher rate.
Some people believe that zero percent financing tempts people to buy things that they can’t immediately afford.
How is zero percent financing possible?
Usually, the auto manufacturer is offering zero percent financing, not a bank or credit union. And you can bet that they are making up the money lost on financing in other areas like the overall car price or your trade-in. Often the dealership uses these special offers to push sales on slow-moving models to make room for new inventory.
Nothing is free and you’ll pay for it with:
- Higher price tag – Sometimes the cost of financing is built into the price of the car. If you are getting zero percent financing, it may be hard to negotiate the price of the vehicle or get other incentives.
- Overspending – With zero-percent financing, it’s tempting to add on packages and get more car than you need or want. Why not? It’s free!
- Loan terms – Watch out because the contracts are written so that if you don’t pay the loan on time or within the allotted time, they can retroactively charge you the higher rate on the original loan amount. Also, some of these deals stretch out 72 months and that’s a long time to make a car payment!
If you have the cash or are pre-approved with your credit union, many times you will get a better deal by taking the cash incentives versus the zero percent financing.
Who can get zero percent?
Auto manufacturers advertise 0% financing but it’s normally only available to people with the very best credit scores and long credit history. These buyers are more likely to make every payment on time and will usually pay the loan off early, which means the manufacturer benefits even more. So, if you have an average credit history or score, this may feel like a “bait and switch” because they will lure you in with 0% but give you a much higher rate when you get to the finance office. Make sure you know your score before you go shopping to see if you will qualify.
Should I make a down payment with zero percent financing?
Some dealers provide 100% financing, but we recommend you put down at least 20%, if possible, to offset vehicle depreciation. If you don’t have the funds for a down payment, consider getting GAP protection on the loan so you don’t fall into an upside-down loan-to-car value situation.
Is zero percent financing ever a good idea?
Do your homework. Zero percent financing is always a bad idea if you can’t afford the loan. Buying a car ONLY because the 0% financing sounds “too good to pass up” is NEVER a good move. Take your time, think about it, do your research, and make sure you are negotiating the best price. Don’t let zero percent financing be the sole determining factor in your new vehicle purchase.
If you are unsure, talk to us. We can review your options and run some calculations to see if you are getting the best deal possible. It’s ALWAYS a good idea to get pre-approved with Members Trust before you go shopping so you know exactly how much vehicle you qualify to purchase. This will help avoid buying “more car” than you can reasonably afford. And the pre-approval serves as a backup in case you don’t qualify for the zero percent offer or you want to take the cash incentive instead. Remember, we also have a recommended list of dealerships that you can work with.