Understanding the 0% Financing Myth

In the simplest terms, 0% means the dealership and manufacturers are not making any profit because you’re not paying any interest.  So it must be the best deal Right…!  Well…., not exactly.

We all know this isn’t possible and truthfully, you should probably be a little miffed that manufacturers aren’t more ethical in their offering. 

So where is the profit coming from?  

Manufacturers need to borrow from banks.  If they are borrowing, there is interest.  If that interest isn’t being charged to you, then they are actually providing you with a loan at their cost.  So actually, they are loosing money by giving you a true 0% offer.

In reality, the purchase price of the vehicle must carry the cost of the borrowing expense from the banks.  Even then, the manufacturer will need to make some profit or else they're out of business.  The cost of the car is actually a combination of costs accrued to cover the expense of running a business as well as providing a profit.  Some of the costs to a retail customer are listed here:  Cost to cover the cost of borrowing, profit on this interest charge, the cost of production, profit on this production etc,etc,etc…

Obviously then, there must be a profit.  Where is it you ask?  Well it must be hidden in the price of the vehicle.  You can go into any used car dealership and they can provide you with 0% financing but the cost of the car will go up by the cost of borrowing.  The dealer would simply “buy down” the rate with the bank.  So in reality, every car CAN come at 0% financing.

So really, the profit in a 0% financing offer comes in the INFLATED purchase price of the new vehicle.  I guess that’s one of the main reasons a new car depreciates so heavily the minute you drive it off the lot.

Here are some additional pricing games involved in the 0% offer.

When it comes to getting a Car Loan, take the time to carefully look at all your options. What you initially think is a great offer, may end up costing you more money in the long run.

Myth: With 0% financing, I’m guaranteed to get the best price, right?

Truth: Offering 0% financing may inflate the price of a vehicle to make up for lost finance charges. This may make it more challenging to negotiate a lower price. A reputable dealer will allow you to negotiate the best possible deal before the 0%.

Myth: 0% is good on long-term loans.

Truth: Although there are exceptions, ask upfront about the length of the loan term available with 0%.  There are offers currently out in the marketplace that provide you with 0% for the first 6 months, 12 months, 24 monhts etc... only!

Myth: 0% is available for the car I want.

Truth: With 0%, your choice of vehicle options can be greatly limited. Usually the most popular vehicles and new models are not available with 0% financing. Be sure to research whether or not you can obtain 0% on your car of choice.

Myth: I can use the cash rebate and 0% financing to save more money.

Truth: Typically, most auto manufactures offer a choice between a cash rebate and an interest-free loan, not both. If you opt to take the special financing, you can lose out on thousands of rebate dollars. Do your homework in the beginning.

Myth: I’m sure I’ll qualify for 0%.

Truth: Unfortunately, not everyone qualifies for the 0%. It’s often reserved for buyers with the best credit. Find out if you meet the requirements for 0%.

Myth: With 0%, I do not need to worry about the price of the car.

Truth: So you think 0% financing means you’re already saving all you can? Even if you qualify for the 0% rate, you can save even more money by negotiating your vehicle’s final price, and taking advantage of any additional offers. Watch your bottom line and don’t leave money on the table

Myth: You can get a good deal on a new car at 0 percent interest.

Truth: A new car typically loses 60% of its value in the first four years.

Understanding the 0% Financing Myth

In the simplest terms, 0% means the dealership and manufacturers are not making any profit because you’re not paying any interest.  So it must be the best deal Right…!  Well…., not exactly.

We all know this isn’t possible and truthfully, you should probably be a little miffed that manufacturers aren’t more ethical in their offering. 

So where is the profit coming from?  

Manufacturers need to borrow from banks.  If they are borrowing, there is interest.  If that interest isn’t being charged to you, then they are actually providing you with a loan at their cost.  So actually, they are loosing money by giving you a true 0% offer.

In reality, the purchase price of the vehicle must carry the cost of the borrowing expense from the banks.  Even then, the manufacturer will need to make some profit or else they're out of business.  The cost of the car is actually a combination of costs accrued to cover the expense of running a business as well as providing a profit.  Some of the costs to a retail customer are listed here:  Cost to cover the cost of borrowing, profit on this interest charge, the cost of production, profit on this production etc,etc,etc…

Obviously then, there must be a profit.  Where is it you ask?  Well it must be hidden in the price of the vehicle.  You can go into any used car dealership and they can provide you with 0% financing but the cost of the car will go up by the cost of borrowing.  The dealer would simply “buy down” the rate with the bank.  So in reality, every car CAN come at 0% financing.

So really, the profit in a 0% financing offer comes in the INFLATED purchase price of the new vehicle.  I guess that’s one of the main reasons a new car depreciates so heavily the minute you drive it off the lot.

Here are some additional pricing games involved in the 0% offer.

When it comes to getting a Car Loan, take the time to carefully look at all your options. What you initially think is a great offer, may end up costing you more money in the long run.

Myth: With 0% financing, I’m guaranteed to get the best price, right?

Truth: Offering 0% financing may inflate the price of a vehicle to make up for lost finance charges. This may make it more challenging to negotiate a lower price. A reputable dealer will allow you to negotiate the best possible deal before the 0%.

Myth: 0% is good on long-term loans.

Truth: Although there are exceptions, ask upfront about the length of the loan term available with 0%.  There are offers currently out in the marketplace that provide you with 0% for the first 6 months, 12 months, 24 monhts etc... only!

Myth: 0% is available for the car I want.

Truth: With 0%, your choice of vehicle options can be greatly limited. Usually the most popular vehicles and new models are not available with 0% financing. Be sure to research whether or not you can obtain 0% on your car of choice.

Myth: I can use the cash rebate and 0% financing to save more money.

Truth: Typically, most auto manufactures offer a choice between a cash rebate and an interest-free loan, not both. If you opt to take the special financing, you can lose out on thousands of rebate dollars. Do your homework in the beginning.

Myth: I’m sure I’ll qualify for 0%.

Truth: Unfortunately, not everyone qualifies for the 0%. It’s often reserved for buyers with the best credit. Find out if you meet the requirements for 0%.

Myth: With 0%, I do not need to worry about the price of the car.

Truth: So you think 0% financing means you’re already saving all you can? Even if you qualify for the 0% rate, you can save even more money by negotiating your vehicle’s final price, and taking advantage of any additional offers. Watch your bottom line and don’t leave money on the table

Myth: You can get a good deal on a new car at 0 percent interest.

Truth: A new car typically loses 60% of its value in the first four years.