5 Reasons to Avoid Zero Percent Financing


Most car buyers are drowning in offers for cash back and zero percent financing. While the latter is no longer as popular as it once was--making up just 7.4 percent of car loans in 2018--it's still the one most people yearn for. But, is it always the best choice? Today we'll look at the benefits of zero percent financing and five reasons you might want to avoid it.

How Is Zero Percent Financing Possible?

Interest is how banks make their money. Without it, they'd be out of business. So, how can they get away with offering zero percent financing? The simple answer? They can't.

Car loans with 0% APR are only possible because it's not your bank or your credit union doing the financing. These loans almost always come from the manufacturer. Since they get their profit from the sale of the car itself, they don't have to charge interest.

Zero percent financing appeals to automakers for two reasons:

  • It Gets People in the Door: There is a small subset of the population that will be lured in by 0% APR. Even if they don't qualify, there's still a potential for a sale.
  • It Boosts Sales: Zero percent financing can boost lagging sales. Automakers will often slap it on old or unpopular vehicles to get them off the lot. This gives the dealerships more room for next year's models.

How You Benefit from Zero Percent Financing

The only benefit of 0% APR is the opportunity to save a bit of cash. With the average car costing $34,000, the average person can save between $680 and $3060. While that's no chump change, it doesn't always outweigh the consequences of opting for zero percent financing.

Five Things You Need to Know About Car Loans with Zero Percent Financing

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Like banks, car dealerships and automakers are in the business of making money. For that reason, loans with 0% APR often help them more than they help you. Here are a few drawbacks of car loans with zero percent interest:

1. Very Few People Qualify For Zero Percent Financing

Research conducted by the National Automobile Dealers Association shows that only a third of buyers who apply for 0% car financing ultimately qualify. Since flawless credit is a prerequisite, this isn't all that surprising. Only 19 percent of the population has a credit score over 700 after all.

And, your credit score is just one of eight factors affecting your interest rate.

But you often don't know if you qualify until after you've picked out a car. There's a reason insurance, pricing, and financing comes right before you drive off the lot.

2. Car Dealers Jack Up the Price of Vehicles to Make Up For It

Dealerships don't make as much money on a car loan with 0% APR. This often drives them to increase the price of the car to compensate. Or, it forces them to only offer the deal on high-end vehicles with above-average profit margins. If you do end up going with zero percent financing, check your invoice for any out-of-place charges.

3. It Forces You to Opt For a Shorter-Term Loan

While automakers are willing to wait for their money, they're not willing to wait for long. Most manufacturers are reluctant to offer zero percent financing on car loans exceeding 36 months. This often saddles you with a higher monthly payment.

4. Zero Percent Financing Is Only Available on Newer, More Expensive Vehicles

Because zero percent interest usually comes directly from the manufacturer, it's often only available on the newest models. This may drive you to overlook gently-used, affordable vehicles that meet your needs. Though a used car will have some kilos on its block, it can soothe the sting of depreciation.

While used cars come with higher interest rates, they usually save you a bundle in the long run. Just look at this example:

Annual % Rate0%(new)6.95%(pre-owned)Cost of Car$29 000$19 999Less Rebate$0N/AAmount of Finance$29 000$19 999Monthly Payment$625$478Total Cost$29 999$22 944Savings$0$7055* based on 48 months

Is netting zero percent interest on your car loan worth almost as much as owning a domesticated fox?

5. It Usually Saves You Less Than a Cash Rebate

Just because you receive 0% financing doesn't mean you're getting a good deal. These offers are usually structured as "0% or $5,000 cash back." By going with the former, you're losing out on that money. But, is it worth it?

Annual % Rate0%6.95%Cost of Car$29 000$29 000Less Rebate$0$5000Amount of Finance$29 000$24 988Monthly Payment$625$596Total Cost$29 999$28 608Savings$0$1391* based on 48 months

In most cases, it isn't.

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