The zero percent car loan: A car buyer’s dream or a deal too good to be true?
When shopping for a new car you may be surprised to see offers from the dealer advertising new car loans at a 1% p.a or even 0% p.a. interest rate. At first glance, this offer is exactly as it appears, you purchase the car at the price given and then make monthly repayments on the principal of the car without any interest being applied to it. However, there are some things you need to know before taking advantage of one of these loans.
How does a 0% car loan work?
These loans are offered by dealership financiers and are generally a sales tactic. Here are the main points to keep in mind:
- You will not be charged interest for a set period
- The principal (amount you borrow) is lower due to a balloon payment
- The purchase price of the car is usually non-negotiable
- You will likely be offered a lower price for a trade-in vehicle
- The loan structure (term, balloon payment) is likely to not be flexible
Is a 0% car loan cheaper than a regular car loan?
This depends. A 0% car loan can be cheaper if you are able to save up your balloon payment while you are paying off your finance. However, this can be difficult to do for a lot of people. 0% car loans can have terms for up to five years, and often the repayments are a few hundred dollars a month.
As the lower repayments are the key benefit of a 0% car loan, saving up $5,000 or more by the end of the loan term can put a damper on this benefit. The advantage of standard car loans are that they have similar loan terms, and while you may pay more interest, the repayments you make will mean your debt will be paid off within the loan term, making it easier to budget.
Where can I obtain a 0% car loan?
In order to entice new business, car manufacturers offer the no interest deals through their dealerships. You'll usually see the 1% or 0% rate advertised by dealerships in order to get buyers in the door.
Alternatives to 0% dealer finance
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What are the pros and cons of 0% finance?
When it comes to car finance, there are a number of options with 0% loans that may work in your favour. Consider the below when comparing.
- Added optional extras.
When you are choosing your new car there may be options available such as alloy wheels, leather interior or other luxury items. With a 0% car loan you may be able to roll the cost of these into the finance. - Capped price servicing.
With a 0 percent car loan from a dealership, you may be able to get a bonus of capped price dealer servicing into the cost of the loan. It's important to check this fact before signing a contract. - Higher loan amounts
Most banks and institutions limit the amount of money they will lend to you for a new car. With a 0% option and a deposit, you may be ale to secure a higher loan amount.
- Inflated cost. The price of the vehicle is almost certainly going to be higher than if you were to buy it with traditional financing. You can check this first by searching online for the average price of the car without the 0% p.a. interest before going to the dealership.
- Large deposit. You are most likely going to be required to provide a significant amount of money down when you enter into the terms for this type of loan.
- Credit history. Typically, only borrowers with a pristine credit history will be considered for this type of automobile financing.
- Fees. Some of the manufacturers are hiding the cost of interest in monthly maintenance fees. Still do the math. In some cases this will equal a very low rate loan, and still one that could be considered.
- High repayments. The manufacturer wants these types of loans paid off fast and will usually limit your options for terms. This will result in a higher monthly repayment for you.
- No negotiating. There is not going to be any negotiating the price of the car when you are getting this type of deal.
- Trade in value. Expect that the car you use as a trade in will be drastically undervalued. In this scenario, you are better off to take the loan as is and sell your old car independently to get a fair price.
Before you lock yourself into this type of arrangement, investigate other types of car loans. Both bank and non-bank lenders will offer personal loans for a new car that may save you more money than with the zero percent interest dealer offer. This is because the loan is for the purchase price of the car, which will likely be cheaper than it would on 0% finance.
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