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Zero percent financing and low dealer promotional rates can be a lure if you are looking to find the best auto financing deal. However, the fine print may tell a completely different story. In many cases, you'll find the seemingly low dealer interest rates are often too good to be true. Below are some key points to keep in mind when considering a low dealer rate incentive:
Low interest rates are often times only offered to individuals with almost perfect credit. If you recently applied for a new credit card or have recently had many credit inquiries, you may not qualify.
Terms are usually much shorter, 24 to 36 months, as opposed to the average 60 month loan. To get the lower rate you may have to prepare yourself for a large monthly payment.
Incentive offers may only apply to slower selling models. Popular models may not offer the specially advertised rates, leaving you as a consumer with less of a selection.
Additionally, there may be application fees or pre-payment penalty fees which should be avoided.
The dealer offers a choice of a cash incentive or low or 0% financing. When you do the math, many times you are substantially better off taking the cash rebate.
Take a look at a scenario where you purchase a $20,000 car with the choice of either $2,500 cash back or zero percent financing. A $20,000 interest-free loan for five years with no cash-back rebate means you'll pay $20,000 for the car over the life of the loan. That same $20,000 car minus $2,500 in cash-back rebates is $17,500. Even when financed at a rate of 2.5 percent for five years, the loan only costs a total of $18,635 in principal plus interest payments. That's a savings of $1,365.
And better yet, you will also save $22.75 each month on your monthly car payment if you take the rebate and get a traditional loan. So the next time you see zero percent car financing, do a little homework and get pre-approved before you shop. That way you can accurately compare the dealer offer to a traditional loan. An informed buyer is always the best buyer!
*APR=Annual Percentage Rate. Sample loan of $17,500 based on an auto loan at 80% loan-to-value with a 2.50% APR. Monthly payment of $310.58 for 60 months. Loans subject to borrower qualification, not all applicants may be approved. Fees and charges may apply. Effective 7/1/13. Subject to change without notice. Conditions, restrictions, and terms may apply.
Michael Patterson is senior vice president of lending for Financial Partners Credit Union.
Published: July 18, 2013 - Volume 12 - Issue 14