Finance Car

The Truth About Zero-Percent Car Financing

What does zero percent car financing really cost? Car dealers have been very successful with their zero percent financing campaigns – so successful that the concept has been repeated in other industries such as electronics, furniture sales and credit card companies. According to CNW Research, only one-third of buyers who apply for zero percent auto financing actually qualify and only 10% of those deals actually close according to the National Automobile Dealers Association.

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CNW Research goes on to state that many zero percent car financing qualifiers overpay for their car, since they assume they’re getting the best deal available and they fail to negotiate the price. Automotive manufacturers use their own financing companies to underwrite these zero percent car financing deals, each of which have their own credit qualifications. Generally speaking an applicant must have close to perfect credit to qualify for zero percent financing. If you have been one of the fortunate ones that didn’t get lured in with the zero percent offers only to get switched to a higher rate because of “blemishes” on your credit and the dealer is now offering you that “free” money,

Here are some drawbacks you should be aware of before signing that deal.

  • Shorter Loan Terms. 36 months is average which means your monthly payments will be much higher.
  • Limited Inventory. The zero percent financing offers are generally reserved for models that are suffer from low sales and is not offered on any pre-owned inventory.
  • Cash Back. Have you every noticed the “or” clause in those zero percent car financing advertisements? You may have seen ads stating “0% or $10,000 cash back” That $10,000 you lose by opting for the zero percent financing is the actual cost of borrowing. This often equates to an interest rate much higher than a traditional car loan.

Adding up the Numbers A recent search of the website of one of the Big 3 automakers shows an offer of zero-percent financing on a 2008 mid size sedan. This is how the numbers work out. Annual Percentage Rate Cost of Car Less Rebate Amount to Finance Monthly Payment Total Cost Savings until $1,391 Based on 48 months. Does not include taxes, administration or other fees dealer may charge. This comparison doesn’t take into account the fact that you are forced to purchase a new vehicle. Let’s take a look at the same vehicle, same model year with approximately 10,000 km on it that was found by doing a quick search on the Internet.

Annual Percentage Rate Cost of Car 0% $29,999 6.95% (Used Car) $19,999
Less Rebate Amount to Finance Monthly Payment Total Cost Savings
$0 $29,999 $625 $29,999 $0
N/A $19,999 $478 $22,944 $7,055
By financing at a low rate and choosing a slightly used car, a consumer would save over $7000 in this instance.

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