Many car dealers advertise 0% car financing and buyers jump at the great deal. After all, on a $20,000 vehicle, you could save thousands versus a five-year loan with interest. But 0% car financing is not for everyone.
Offering you the chance to drive away in a new car with zero percent car financing is a great way for the dealer to get you onto the lot. Many people mistakenly believe they can afford an even more expensive car with a no cost loan because they will not be paying interest. But this is rarely the case.
Have you ever noticed on the commercials for zero percent car financing that half of your television screen is filled up with print so tiny you need a magnifying glass to read it? In the fine print, you will find so many exclusions that few will ever walk away from the dealership with these great deals. Let's look at why you may decide a loan with an interest rate is a better deal.
Zero percent auto refinancing is only for perfect borrowers
Very few people will qualify for 0% auto financing. Your credit report determines if you will qualify for this type of financing and the guidelines for credit are very strict. If you have perfect credit, these deals may be attainable for you but many borrowers have at least one blemish on their credit report. That one blemish can ruin your chances for this type of financing. But by the point you're discussing the interest rate at the dealership, you already feel like the car is yours. The dealer knows this and will use your enthusiasm to help his bottom line.
Zero percent car financing is reserved for select vehicles
Dealers typically only offer the 0% percent car financing option on select vehicles on their lot. Nine times out of ten it is the slow moving vehicles that have the deal attached to them. It is the dealer's way of offering an incentive to the buyer so he can get the vehicle off of his lot. If you are dreaming of a slower selling car, this may be a great deal for you. But for many of us, our dream car would not be offering the 0% car financing option.
Generally, you will also only be offered the cars on the lot. Even if you are interested in the vehicle with the best auto financing option, you may want a different color or leather seats instead of cloth. The dealer will gladly find a vehicle for you with all of the options your heart desires but your interest free loan will no longer come with it.
You can't have a rebate and 0% car financing
Dealers will sometimes advertise that they offer 0% percent car financing and a rebate. But in the small print, you will find that you can have one or the other, but you can't have both. You'll have to look at the numbers closely to decide whether the rebate or the 0% interest rate is the best way for you to go. But for those who don't qualify for zero percent car financing because of credit history, the rebate is for you.
Shorter terms on 0% auto financing options
Many times this financing option is offered at a much shorter term than a typical car loan. These loans are generally no longer than 36 months, whereas many people finance a new vehicle for 48-72 months. Because of this, the payment on the loan will be higher even with no interest.
| ||Loan A ||Loan B |
|Loan amount ||$20,000 ||$20,000 |
|Term ||36 Months ||60 Months |
|Interest rate ||0% ||5.9% |
|Payment ||$555 ||$385 |
As you can see, there is a significant increase in your monthly payment with zero percent car financing versus a traditional car loan. For many borrowers, it's worth paying interest to keep the car payment reasonable.
So the next time you see 0% car financing, don't assume it's the best deal around. Do your homework on other car financing options and be sure to be realistic about your ability to qualify. An informed buyer is always the best buyer!