Should You Take the 0% Financing Offered by a Dealer?

Question: I’m in the market for a new set of wheels, and I’ve seen some dealers advertising zero-percent financing. Should I take this offer?
Answer: An auto loan without any interest sounds like a dream; however, there are many considerations before deciding to take out a zero-percent financing loan. Let’s take a closer look at zero-percent financing so you can make an informed, responsible decision about your auto loan.

What is zero-percent financing?
An auto loan offer of zero-percent financing means the dealer financer is offering to lend the buyer money without charging any interest over the life of the loan.

With traditional loans, the lender is willing to extend money to the buyer because the lender will reap the benefits of the interest payments over the life of the loan. A zero-percent car loan, though, offers no reward for the lender. In fact, the loan is actually being offered by the auto manufacturer. The automaker stands to benefit from the loan as much as it would from an upfront cash payment for one of its cars. The only difference is that the money is earned over a longer time span. Automakers may offer zero % financing on slower-selling models or to help clear out stale inventory to make for newer models.

Can anyone qualify for zero-percent financing?
Zero-percent financing may be heavily advertised, but it can be difficult to qualify for one of these loans. They are typically only offered to buyers who have excellent credit, including a credit score above 700 and a long credit history. These buyers are more likely to make every payment on time and they may even pay off the loan early, making it low risk and profitable for the automaker.

It’s also important to note that not everyone can afford to take out a zero-percent financing loan. Since the lenders are only profiting from the actual sale on these loans, they will rarely agree to bargain down the price, nor do they offer any other incentives, such as cash-back rebates.

When is zero-percent financing a good idea?
For buyers who qualify, a zero-percent financing loan may be a way to save on steep interest payments throughout the life of an auto loan. It is crucial that qualifying buyers crunch the numbers to be sure they can easily afford the monthly payments on a zero-interest loan. If all the numbers add up and the buyer’s credit makes the cut, a zero-interest loan can be a great way to save money.

When is zero-percent financing a bad idea?
Zero-percent financing may not be in the best interest of buyers who can’t actually afford the loan. As mentioned, lenders generally will not bring down the price on a car with a zero-percent financing offer. Buyers may be blinded by the temptation of not paying any interest and therefore consider a vehicle that has a higher monthly price tag than they originally planned.

Another point to consider before committing to a zero-down financing loan is the term of the loan. Some of these loans feature longer terms than traditional auto loans, as much as six years. Six years is a long time to be paying for a car. The buyer’s auto needs may change before then and they won’t own the car for a year longer than they would have through a traditional loan. On the flip side, lots of zero-percent financing loans are only four years long, which can significantly increase the monthly payment amount.

Even if the loan terms do meet the buyer’s needs, it still may be worthwhile to skip the zero-percent financing and take out a traditional loan so the buyer will not miss out on cash-back rebates. These are typically not available on auto loans with special financing offers, and can mean missing out on robust incentives.

Let’s take a look at the purchase of a single car and run check out some scenarios.

Price of Car Rebate Annual Percentage Rate Term Payment
$20,000   0% 4 Years $416 monthly
$20,000   WKFCU 3.49%-.25%*= 3.24% 5 Years $362 monthly
$20,000 $2,500 WKFCU 3.49%-.25%*= 3.24% 5 Years $317 monthly
$20,000   5.10% APR (Bank Average) 5 Years $378 monthly
$20,000 $2,500 5.10% APR (Bank Average) 5 Years $331 monthly
(*Membership Loyalty Discount)

A car is selling for $20,000 with the offer of a zero-percent financing that is only available for a term of four years. Monthly payments on this loan will amount to $416.

If you finance the whole $20,000 at WKFCU, where you can get a term of 5 years and take advantage of our Member Loyalty Discount to lower your rate, your monthly payment would be $362. If you take advantage of the Rebate and finance $17,500 with WKFCU, your payment would be $317. The total amount paid on the car would be less than the amount paid through the no-interest loan at $19,020.

Evidently, when there is a shorter loan term involved, it is not always worthwhile to take out a zero-percent financing auto loan.

It’s best to run your own numbers through a free auto loan calculator to see what your actual monthly payment would be before taking on a loan. It’s the best way to determine if you can afford the payments without overextending your budget. Check out our calculators on AUTOLINK on our website, https://www.wkfcu.org/Loans/AutoLink/#AutoLinkPage=calculators/show/AutoRebate

If you’re ready to get started on your auto loan, apply today. Fill out an application on our website, www.wkfcu.org, we will be happy to fax you an application or pick one up at a branch.

We’ll have you seated behind your new set of wheels in no time!

Reprinted in part from CUContent.

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