The Truth Behind 0% Car Loans

As we all try to make more intelligent financial choices, we look for ways to minimize interest on our high ticket items. The two that often leave us shelling out significantly more than our original ticket price are our home and our car. So, when you hear of a local car dealer offering a 0% interest car loan – you might believe it is the perfect time to buy. Here’s what you need to know.

Dealerships Want to Entice You To Buy

The truth is, the “0% car loan” is a marketing strategy designed to be the tipping point. For example, if you are planning on waiting 6 more months so you can save a bit more to put down—hearing about 0% interest might motivate you to buy sooner rather than later. Since the whole point of saving more money to put down is to reduce your accumulative interest, no interest is tempting. Or, if you are simply on the fence about a car, no interest might be just what you need to go from maybe to a solid yes. But it’s not that simple.

Zero Interest Doesn’t Really Exist

While your contract and monthly bill won’t have any interest added to it, the interest is simply transferred to the dealer. This means your loan is financed through the dealer, who must pay interest to the financier. In order to cover their interest, they must build the interest into your ticket price. In other words, you are still paying the interest—you are just crystal clear on the exact price of the loan over the term.

Little To No Room To Negotiate

Dealers will try to sell you on the “cost saving” benefits of 0% interest, but you will find that they will also be unwilling to budge on the price of your car. If they say the ticket price is $40,000—you will pay $40,000. Why? Since the interest is built-in to their costs, there is little to no wiggle room. If you wait to buy, or simply explore your interest loan options, you will be able to find a car that you can negotiate the price on, and maybe even add some free upgrades. With a low standard interest rate for a car in the $50,000 range, you will pay around $4,400 less over the term of the loan—even if you don’t negotiate a lower price. Whichever route you choose, you must also make sure you understand a reasonable trade in value of your current car.

Be Careful Before You Agree To A Balloon

Some buyers like the transparency of 0% interest loans, because even though they pay more in the long run, they know upfront exactly what they will pay over the term of their loan. However, some 0% interest loans are not so transparent. If your dealer tries to sell you on a loan that has a balloon payment at the end of the term, really think twice. Agreeing to a balloon payment may offer you zero interest and/or a lower monthly payment—but the amount to be paid (the balloon) is a variable. Yes, it’s several years away, which makes it easy to think you have time to save—but you may end up having to pay 20 or 30 percent of your car’s original value at the end of your loan. For a $40,000 car, this is in the range of $8,000 to $12,000.

So What Is Your Best Option?

If you are ready to buy, but don’t want to fall victim to the common selling and marketing ploys outlined above, you might be wondering what your best option is. If you are looking for a competitive range of bank-beating finance options, from Australia’s most trusted financiers—reach out to one of our friendly consultants today on 1800 538 287. Each of our expert consultants has over 10 years’ experience in the finance industry and can provide you with unbiased and direct access to hundreds of financing options. Remember – we work for you! Our goal isn’t just to help you find a loan, but to find the loan that is the best fit for you!