What’s the problem with 0% APR car financing offers? I’ve heard negative things said about them several times, but I don’t really understand. Why are they so bad?
No. A 0% car loan is not too good to be true. In fact, it is a great way to finance a large depreciating asset like a car.
An auto purchase typically involves a significant monetary outlay. The average car price in 2013 is now roughly $31,252. This type purchase is one that many consumers cannot make from existing savings. Many of these purchases require the potential buyer to obtain an installment loan to pay for the car.
In order to compete with other auto dealers, some will offer 0% financing. Basically they allow YOU to use THEIR money to buy the car. Why would they do this? It's possible you would not buy the vehicle from them if the financing offer wasn't made. Once you've made the purchase, the dealership is hoping that you will rely on them for future service needs.
If you qualify for a 0% loan (only about the top 10% of credit rating will), the loan period is typically shorter so monthly payments will be higher. Dealers are less likely to negotiate the purchase price of a vehicle that will be financed for 0% interest.
So if you can qualify for a 0% loan and can negotiate a fair price for your car, there is little reason not to take advantage.
Travis Sollinger, CFP
Entering into the car buying coliseum can be traumatizing at best. Good luck with your adventure.
That said, somebody, somewhere has got to be paying for the money you'll use for this transaction. They are not getting money from any lending institution for free. So that cost is buried somewhere in the cost of your vehicle. Please do not fall for the "here's the invoice" gambit. There are incentives and cash available from the manufacturer to the dealer even after you pay "invoice price" that can add to dealer profit at "invoice price". General Motors before their bankruptcy used to have an invoice price shown in paperwork on a vehicle. But if you looked closely, there was a lesser price for a GM supplier and an even lesser price for a GM employee. How can one vehicle have three invoice prices?
With the advent of the web, the playing field for car buyers has leveled somewhat. Numerous sites should give you all the info you need to help in your quest prior to ever entering a dealership. Most importantly, arrive at the price you are willing to pay for your new vehicle before you ever bring up how you plan to pay for it. If the dealer knows that there's profit to be made via the financing, you give up some bargaining leverage.
0% isn't in itself, bad. But to borrow a line from an old television show, "be very careful out there".
There is really NO SUCH THING as a 0% APR car loan...read the fine print! Every commercial I have seen, and documentation I have reviewed for clients or community members includes a "fee" of some sort, based on the amount of the loan, which - in my opinion - is just hiding an APR on the loan.
This "fee" is often stated like,
"monthly processing fee of $16.67 per $1,000 loan value"if my calculator is correct, that's basically a 1.667% loan...NOT a 0% loan. Don't get me wrong, a 1.667% loan is a phenomenal rate...but don't tell me it's a 0% loan and charge me a "fee" based on the loan's value. It's disingenuous in the best light, and blatant false advertising in the worst light!
Let's be open about fees, expenses and quit hiding things from the public...I believe it is the ONLY way to build confidence in our financial industry.
Now to answer your question, is a 0% loan a good thing...well, as long as you understand the added "fees" in the contract and agree with the cost of the loan over the term of the loan, go for it!
Hope this helps!
There are 0% APR car loans; however, they are only available for people with extremely good credit scores. Car companies use these advertisements to get people into their stores and then they break the bad news as far as what financing plans they can offer you. If you are about to buy or lease a car, I would advise you do to do your homework before you go to the car lot. See what specials and deals the dealership has advertised. Get a good idea on how much the car is really worth. Know what your credit score is and then figure out what your monthly budget is. And stick with the budget. Car dealerships only make money when they sell cars, but make them work for your sale. If you stick with your budget number, as long as it is realistic, they will find a way to make it happen. Good luck!
0% interest rates may be available, but that does not mean you are getting a good deal. A vendor could jack up the offer price and spread out your payments such that their inflows (your payments) were the same as those associated with a lower price/higher interest combination.
You also need to be wary of whether the initial interest rate is simply a teaser such that higher interest rates apply later in the contract. To help eliminate any confusion, request a complete payment illustration. Avoid someone who is unclear about your payment obligations. Plus it’s generally to your advantage to solidify a car price range before financing discussion take place. That way you are less apt to get lost in the numerical gobbledygook.
There are several moving parts in the purchase of a car. So you get a deal here and you overpay there. I would shop around and find out what the car should really cost. Then compare that to what you are paying for a 0% APR.
Buying a new car guarantees you are going to lose about 30% of the purchase price the minute you drive off the lot. Go to swaplease.com and you can find a realistic value for practically any car. You can assume the financing of those cars or get your own. It is worth doing a little work to keep from making a mistake.
Since lending money has cost, it stands to reason that it should be more than 0%
What a 0% car loan means is that the cost of financing is buried into the cost of the car. You don't see a separate line item that says interest, but it is in there somewhere. Unfortunately, if you tell your dealership that you are willing to pay cash for your car if only they reduce the price, since they now they don't have a cost of hidden finance, they will probably refuse.
That is because the dealer is not paying for the cost of finance, the manufacturer is. Hence if you have a 0% deal, and you have read the fine print, and you like the car, you might want to go for it
I think the “bad” part about this is that when you hear 0% APR it gives you a false sense of savings. Whatever amount you would have paid in interest is likely to have been built into the price of the car, so in effect you are still paying the same amount, it just feels better! So, the key here is to be sure that the total price you pay for the vehicle is fair. There are some great websites out there to help you establish what a fair price is. One that I have used with great success is cargurus.com, but there are others. Once you establish what a fair total price for the vehicle is, calculate what you would pay in interest on this vehicle if you had a car loan, and add it to your “fair price”. If the dealer is asking more than this, 0% is a bad deal.
Best of luck!
The main problem with a 0% car loan is that you must buy a new car to qualify. New cars by default are almost always a poor “investment” (although not by definition an investment) so you start out behind.
If you are determined to buy a new car, however, 0% is the way to go. Just be prepared to begin getting emails halfway through the loan period telling you that you “qualify” to get another new car at 0% and can trade in your current “used” car. That keeps the cycle of new car purchases going.
Good luck and I hope this helps!
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