The 0% Financing Myth

If you have been paying any attention to cars lately, you have most likely heard of 0% financing.  Perhaps you have seen commercials and heard enticing sounding offers on the radio.  The fact is that when buyers hear the phrase “0% financing,” they tend to get very excited.  After all, it sounds like an extremely good deal for the buyer.  Consumers know that interest can really add up and so they immediately assume that with 0% financing they will be getting a far better deal.  However, the fact of the matter is that this isn’t always true.

Of course, when a loan is being offered at 0% interest rates, many buyers assume that this means that the dealership and the manufacturers aren’t making any money from your loan.  However, this indeed is a myth.  The fact of the matter is that the price that you pay for the car must end up carrying some of the borrowing expense.  The manufacturer can’t just make zero profit from the sales of their cars.  If they were offering these sorts of deals to their customers, they would quickly go out of business.

The striking fact that is important for every car buyer to understand is that when they receive 0% financing deals, the cost of the vehicle that they are buying increases.  What ends up happening is that the dealership “buys down” the rate with the bank.   Every car dealership can offer its customers this type of 0% financing deal.  However, the car’s purchase price will go up to reflect that savings. 

Just because you have confirmed 0% financing, doesn’t mean that you are getting the best deal.  Once a car dealership offers you 0% financing, you then lose your ability to negotiate down the cost of the car.  If you really want to get the best deal on your car, be sure to negotiate your price before arranging any financing deal.  Also it is important to be aware that car dealerships won’t typically offer the 0% financing deal on all cars. Often it isn’t offered on new models or on bestselling vehicles.

Another factor that it is important to be aware of is that your 0% financing rate may not be for the loan on a long-term basis.  Often these loans are only 0% for the first 6 months, or the first year.  Be sure you know the exact length of the financing arrangement before you make a decision.

Additionally, if you don’t take the 0% financing deal, you may be able to get some cash rebates that are actually far more valuable that the financing package that sounded so good in the commercial.  Most auto manufacturers allow consumers to choose between an interest-free loan and cash financing.  Both options typically aren’t available.  Make sure you have examined all options for what might be available to you before you sign on the dotted line.

Sep 8th, 2010