Is Zero Percent Financing a Good Deal?

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Everyone wants a good deal. When shopping for a new vehicle, you might find yourself asking, “What is a better deal than zero percent financing?” This sounds like a tremendous offer, but with a little bit of research, consumers may find that there are better options available.

Dealerships advertise zero percent financing to get consumers onto their lots. This offer is typically only available on select new models and for well-qualified borrowers (700+ credit score), and usually, the loan term is capped at 60 months. A shorter term means a higher monthly payment. Therefore, even if you decide to purchase one of the selected models and you have the required credit score, you may find the payment does not work for your budget. And all of this is before even thinking about the fine print, where there is a good chance that you will learn a late payment will increase the rate.

If you decided to proceed with your new vehicle purchase and the zero percent financing offer, know that negotiating the sales price is less likely. New vehicles can depreciate up to 11% the moment you drive the car off the lot and up to 25% in the first year of ownership. Considering this, unless you put money down, you will have negative equity soon after your purchase.

For eligible vehicles and borrowers, dealerships may present another offer: choose between zero percent financing or a rebate. Let’s compare the choices using a common $2,000 rebate:

Zero Percent Financing Offer Rebate Offer
Sales Price $20,000 $20,000- $2,000 rebate= $18,000
Interest Rate 0% 2.49%
Loan Term 60 months 60 months
Payment $334 $319
Total Interest Paid $0 $1,163.54
Total Paid $20,000 $19,163.54

The option with the lower monthly payment and lower total amount paid for the car is the rebate offer. Remembering that you also have a better chance to negotiate sales price if you choose the rebate offer, the best option for your wallet seems clear.

Car buying tips:

  • Determine a monthly payment that fits comfortably into your budget before going to the dealership.
  • Do your research by using online portals such as True Car that compare similar sold vehicles in your area.
  • Consider the car that meets your needs rather than the interest rate that does.
  • Negotiate the sales price.
  • Get pre-approved with your credit union.
  • If you finance through the dealership, remember you can refinance with your credit union at any time.

The lesson to take away is to remember to do your homework. An offer of zero percent financing often gives consumers a false sense of savings, but just like anything that seems too good to be true, doing your research can help you be confident in your decision.

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