If you’ve been shopping around for a new car lately, you’ve probably come across a range of incredible special offers and incentives such as zero percent financing. Zero percent financing is currently one of the most popular incentives in the car industry, and it suggests that you can actually finance a car without paying any interest over the term of the loan. You’d be forgiven for being sceptical because this sounds just too good to be true.
What Is Zero Percent interest?
Each time you take out a car loan, you’re borrowing money to pay for the car. The bank lending you the money charges you a fee in the form of interest on the loan. This interest is the cost of taking out the loan. The concept of zero percent interest loans means you are getting the privilege of borrowing money without having to pay a penny in return.
It is important to educate yourself before signing up to zero percent financing as it may not always be in your best interest. Here are facts that you should know about zero percent financing:
- You typically pay a large deposit upfront (35% or more is common), and if you miss any payments, you’re usually switched to a higher interest rate.
- It is offered by the finance arm of major vehicle manufacturers, not the dealers or the bank.
- Zero percent interest is often very difficult to quality for. It’s only available to shoppers with the absolute highest credit scores and a long and stellar credit history.
- Some interest free deals have loan terms that are too short, which will require very high monthly payments.
- Dealers typically use the allure of zero percent financing to attract buyers to the dealership. If you qualify for zero interest financing, the dealership will often offer an incentive such as a $3,000 rebate or zero percent financing on a car for an extended period such as 84 months. Most people jump at the 0 percent because they think it’s free money. The trouble is that the $3,000 you’re passing up is really not a rebate. By opting for the zero percent financing, you are going to pay $3000 more for a rapidly depreciating asset. Furthermore, if you buy the car at the end of the model year, its value has already decreased significantly.
- If you decide to trade-in your car after a couple of years, you’ll be in for a rude awakening, because the car will have depreciated much faster than your payoff amount. For example, if the car is worth $15000, you might find that you still owe $19000. That $4,000 deficiency will have to come out of your pocket to fully satisfy the loan.
- Zero percent finance loans are only often offered as a financing option for the dealer’s choice of vehicle, such as the hard to sell vehicles in order to move the cars off the lot. This financing doesn’t apply to premium models.
If you are planning to own your car until the wheels come off, then zero percent financing is well worth the risk. However, if you are the type that likes to drive a new car every few years or so, this type of financing may not be the best option for you.