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Why Zero Percent Dealer Financing is a Costly Option
July 12, 2016
Some car dealerships heavily advertise zero percent dealer financing as an option for financing the purchase of motor vehicles. As attractive as the zero percent option may sound, this type of financing may end up being a very costly option. If this type of financing sounds too good to be true, it may be because it sometimes is.
Zero percent financing is when a car dealership offers to finance the purchase of a car without charging any interest at all. But why would a car dealership do this? A car dealership often offers zero percent financing in order to stimulate the sales of slow selling vehicles or as a special promotion in order to sell more vehicles. For you, this often seems like a great deal. But there is a catch.
Dealers will advertise “$6,000 off the MSRP”, “0% Financing available”! The reality is that you must choose; 0% financing or a much higher vehicle price. When taking the 0% financing option, you are essentially giving the dealer the full cost of the vehicle plus the interest you could have paid with a mediocre rate - all up front.
The dealer may see the loan as a low risk and is therefore confident you will commit to it- and you will have to! Without the “$6,000 off the MSRP”, you are financed well beyond the value of your vehicle, and with 0% financing, you aren’t even able to refinance for a better rate in the future! You will not only be upside down in the vehicle, but literally stuck with the financing option with the high price you signed for. In this case, the better deal is to take the money off the MSRP, or rebate, and shop around for the best financing as possible. Even if you make a mistake with the first lender, you will not have overpaid for the vehicle’s value and will have leverage when refinancing at a different dealer.
Additionally, if your credit happens to improve over time, you could refinance, or use any earned equity in your vehicle to help consolidate other loans. With 0% financing, it can take much longer to pay until you have equity in your vehicle because of the high upfront cost and rapid depreciation of newer vehicles.
With 0% dealer financing, the only wiggle room you have in monthly payments is by adjusting how long you pay for the vehicle, and ultimately how much it will cost. A long payment term often means that the value of the vehicle is depreciating while payments are still being made. In addition, unless you makes a significant down payment, you could end up paying far more than the vehicle is actually worth. Towards the end of the loan’s term, you will have a fraction of the value in equity versus the amount paid towards it.
Quick tips: - Focus on getting the price of the vehicle down, financing can also be re-negotiated after, but the price you paid cannot
- 0% interest is a rate and payment that can be binding, without the ability to negotiate a better loan in future, having signed off for a high purchase price in the deal
-Don’t focus only on the monthly payment or interest rate, look at the overall cost of the vehicle, including the addons required with the promotion
-Compare your financing options with your credit union; don’t just stick with the dealer options