As we strive to make prudent financial decisions, we seek methods to reduce interest expenses on our big-ticket purchases, such as homes and vehicles. However, we often end up paying much more than the original price.

Therefore, when you encounter a local car dealer providing a zero-interest car loan, you may assume that it’s the ideal opportunity to make a purchase. Nevertheless, there are some critical facts you need to consider.

The concept of a “0% car loan” is actually a marketing tactic meant to sway consumers. For instance, if you were planning to save more money for a down payment over the next six months, the allure of 0% interest might push you to buy sooner than you intended. After all, the reason for saving a larger down payment is to minimize the overall interest paid, so the idea of no interest is quite tempting.

Similarly, if you’re undecided about a particular car, the notion of 0% interest could be the push you need to make a firm decision. However, it’s important to recognize that the reality is more complex than it seems.

What is a Zero-Interest Loan?

Although a 0% car loan may sound like a good deal, it’s important to understand that the interest is generally not actually waived. The interest component is instead transferred to the dealership, who must pay interest to the financier. In many instances they will be one in the same. As a result, the dealership builds the interest into the ticket price, so you are still paying the interest, but it is included in the overall cost of the loan.

Therefore, while your contract and monthly repayments won’t look like they include any interest, you will still end up paying a similar amount over the loan term.

How zero-interest loans can lead to impulse buying

Car dealerships frequently advertise zero-interest loan promotions on local radio stations and TV, but prospective buyers should only consider these offers if they truly need a new car and are in a stable financial position to make the purchase.

Unfortunately, these ads can entice buyers to make impulsive purchases, even when it may not be practical for them to do so.

Zero-interest loans limit space for negotiation

Dealers may highlight the supposed cost-saving advantages of a 0% interest loan, but they are unlikely to budge on the car’s price. If they quote a price of $40,000, that is what you will have to pay.

The lack of wiggle room is due to the built-in interest costs. Waiting to buy or exploring other interest loan options may lead to finding a negotiable car price, and perhaps even free upgrades.

A standard low-interest rate for a $50,000 car means you will pay approximately $4,400 less over the loan term, even without negotiating a lower price. It is also important to understand the fair trade-in value of your current car, regardless of the path you choose.

Exercise Caution Before Accepting a Balloon Payment

Some buyers prefer the clarity of 0% interest loans because they know the exact amount they will pay over the loan term, even if it means paying more in the long run. However, not all 0% interest loans are transparent, and buyers should be cautious of loans that include a balloon payment at the end of the term.

While the loan may offer zero interest or lower monthly payments, the balloon payment is a variable amount that can be as high as 20 or 30 percent of the car’s original value. For a $40,000 car, this can mean paying between $8,000 to $12,000 at the end of the loan term, which is a significant amount to consider.

What would be the most suitable car loan option for you?

If you’re planning to make a car purchase but don’t want to succumb to common sales tactics, you might be wondering what your best option is?

Speak to one of our friendly and knowledgeable Car Finance Consultants today on 1800 538 287 or simply get an obligation-free instant online quote now and your Finance Consultant will be in contact asap.

We can compare hundreds of car finance products from over 40 of Australia’s leading bank and non-bank lenders to save you time and money on your next car loan. 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!

The best part is, the whole process is obligation-free, so at any time, if you are not happy with the finance options or don’t wish to proceed with finance, you can walk away with no obligation to take out finance through us.