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0% Interest Auto Financing

Browse online and you will quickly notice that the single most common marketing term used across numerous consumer products is ‘0% auto financing’. It seems too good to be true, how do lenders make money if they are lending it for free?

This financing deal is popular. It is not just limited to expensive consumer electronics, as automakers frequently advertise zero per cent auto financing deals nowadays. Before explaining the idea behind these deals though, you should understand how financing and car loans work.

Financing 101

Once you have found the right car, the most common method of purchase is through financing. Financing deals can be direct, where you apply for loans from banks, private lenders or credit unions. They can also be indirect, where the dealership settles a deal for you. Upon agreement, the borrower repays the lender a set amount regularly through an amortization period. The payment made is based on the principal, with interests and down payment in mind.

0% Auto Loans

Therefore, 0% financing means that you are only paying back the principal over the agreed period. It seems like free money, and it works to entice prospects. However, this type of financing deal is typically indirect. It is often a collaborative effort between dealerships that sell brand new vehicles and lenders, with sizable processing costs and multiple caveats.

Look at it from the surface, it is tough for an average consumer to qualify for a 0% financing deal. The criteria are often unrealistic for most people, most apparent of which being that you must boast a stellar tier 1 credit score. Manufacturers offering this deal want the least amount of risk on their end, which can also mean short loan terms. Every application is subject to stringent requirements.

While it is possible to be approved for special financing deals like this with flawed credit, you’d need to prove that you can make the regular payment in full every time. Collateral, big down payment and guarantor are just a few. Loyalty to the marque also helps. Often though, a bad credit disqualifies you immediately. Mysteriously if you pay for the vehicle with cash the price is much less, so the 0% is really a gimmick where the hidden real cost of borrowing is already priced in the vehicle.

The Math

Even if you fail the screening process, It is not that big a deal. The thing is that this type of offer often requires you to forfeit a cash rebate. For example, a manufacturer we are familiar with is selling their $32,000 well-equipped compact crossover for 0% interest over 48 months. This works out to approximately $668 per month in payments without a down payment.

However, said manufacturer is also offering a choice of $1,500 cash rebate. If you apply for a loan from a reputable lender with the leverage across the same term at 4% interest, it comes out to roughly $690 per month. It is ~$20 more, but keep in mind that this is no negotiation without down payment. Furthermore, the 0% financing is exclusive for a 48-month term, which is somewhat unrealistic for the average buyer. It is worth noting that cash rebates also work out better for more affordable cars.

Moreover, sometimes these 0% finance deals come with a surprise. Whether if it is in the form of an advanced monthly payment or a final lump sum payment at the end of an amortization period. Always take your time to read through the contract before signing the deal.

Bottom Line

If you think about it, without the cash rebate, 0% financing inflates the price beforehand. It gives you the illusion that you are walking away with a great deal. Given how tricky it is to be eligible for these special 0% financing offers, you should not feel too bad. It is not as good a deal as it seems. Of course, if you manage to qualify for one, it can be a better deal, but do your calculations beforehand.