Jul 17 2008

My theory on 0% APR financing

In this area, I’m starting to see truck commercials advertising 0% financing for six years.

I’m sure this promotion is designed for people who want to buy a car, but hate the thought of paying 7% interest on a car loan for 72 months. The thought of 0% interest for the life of the loan probably sounds appealing. Nevermind the fact that you’d probably be in debt for six years.

I can’t confirm my theory (well I can, but that would involve me going to a car dealership and acting like I wanted to buy a car), but I think this 0% financing deal isn’t a deal at all. No real research other than seeing these commercials has gone into this post, so I acknowledge I could be totally wrong. But:

For starters, the financing is subject to credit approval–likely, you need to have excellent credit to qualify. That means that for most people, the 0% offer is just a gimmick to get you into the dealership.

In each of these 0% financing commercials, they don’t tell you the price of a vehicle or even the monthly payments.

As a result, the overall price you could be paying might be a lot more than if you financed it yourself.

For all we know, when you go to negotiate the final sale price of the car and the salesman knows you want the 0% financing, the final sale price you get will probably be higher than the guy who walks in and pays cash.

So they don’t lose money, my guess is that these prices are inflated. Instead of paying 7% apr on a car loan, the price of the 0% apr car is probably adjusted up by 7 percent (or more!).

Because really, a car dealership is not going to set itself up to lose money. No ma’am. They’re making money with every car sold, including that 0% financed car.

If you have to take out a loan to get a car but hate debt, you’re probably better off negotiating the lowest overall price first, then discussing financing options after you have that final price established. Then, finance it with the bank that offers you the best rate or heck, pay cash.

If you’re paying 7% apr to a bank but can pay the car off in 3 years instead of 6, you’ll probably come out ahead than if you got a 0% interest loan with no incentive to pay it off early.

Here’s an article from a credit union (clearly, they’d prefer you finance with them than at the dealership) that explains more of why 0% apr isn’t necessarily a good thing.

Can anyone confirm my theory? I hate to post something with such minimal research, but I really can’t bring myself to go to a car dealership.



14 Responses to “My theory on 0% APR financing”

  1. And the catch is, to get 0% financing for 6 years, you have to buy a HUGE TRUCK that you’ll be paying off for 6 years… can’t imagine what you’ll be paying extra in GAS for getting the huge truck instead of the efficient car (or even small SUV!) the way gas prices have been going.
    Also, you’ll most likely be upside-down on the loan for quite a while, since truck prices are plummeting because everyone wants something that’s not a gas guzzler.

    Trucks are really hard to sell right now, hence deals like this.

  2. I have a friend who works in a car dealership. I know from what he says that you are right about this:

    For all we know, when you go to negotiate the final sale price of the car and the salesman knows you want the 0% financing, the final sale price you get will probably be higher than the guy who walks in and pays cash.

    The business is there to make money. Since they don’t make anything off the 0% finance, they have to make it on the price of the car in the first instance.

    Solomon’s last blog post..The “Things I’m Grateful For” July contest – NOW RUNNING!!

  3. Joanna already commented with exactly what I was thinking. Whateve you save in financing, you are making up for with the extra gas to fill the truck up.

    I had to chuckle to myself recently when I read another blogger’s post on buying a truck. They had wanted to buy a car, since they are better on gas. But the better financing deal was on the truck, so that’s what they got. Hmmm doesn’t sound like a deal to me.

    Wish people would think these things through alittle bit more…

  4. My husband and I in the market for a new car and we will not be falling for the 0% financing gimmick.

    I don’t know what the catch is but I think that you may have hit the nail on the head.

    Hadias’s last blog post..I am Getting Financially Fit

  5. The last thing you usually negotiate is the financing. After getting the prices down to something you agree to and getting all of the options you want you go to a small office to meet the finance manager. You better know your credit score because he won’t take it into consideration unless you tell him what it is!

    That said the 0% could be no-strings attached. Car companies are hurting and they are doing everything they can to move cars. If they don’t keep sales up then they are forced to shut down factories or eliminate car lines. GM hit it’s lowest stock price since the ’40’s recently! And with gas prices what they are car companies are probably sweating all of the truck inventory that’s sitting out there. If you really need a t truck now could be a good time to buy one. Just make sure you know your credit score before hand!!

    FFB’s last blog post..Some Rights Reserved

  6. You *always* have to be careful every time you walk into a car dealership, but 0% financing isn’t necessarily a scam. Right now they’re flogging trucks, but sometimes you can get 0% on last years models when the new ones have come out.

    First of all, do your research first. Know what you want and what you should expect to pay for it. Negotiate the price and don’t be afraid to walk away or to threaten to do so.

    Once you settle on a price, *then* you talk financing. That’s the point at which you discuss your trade-in, your down payment and wanting 0%. It’s also the point where they try their best to upsell you on all the “little extras” like rustproofing, undercoating, extended warranty, etc. This is where they make tons of money, not on the financing, so really be aware and don’t get talked into stuff you don’t want or need that will add up to $50/month to your payment.

    And, if they tell you that you don’t qualify for the 0%, do you have to stay? Isn’t the whole thing subject to financing anyway?

    I mean, I could walk into our local luxury car dealership and say I’m willing to pay $100,000+ for a Bentley or a Rolls, but if I don’t qualify for the financing they’re not going to let me walk out with a car!

    Shevy’s last blog post..I Can’t Pay My Bell Cell Bill

  7. This article includes a stat mentioned only in general terms by the credit union:

    http://archive.southcoasttoday.com/daily/09-02/09-22-02/d08bu180.htm

    “While 70 percent of normal buyers haggle, zero percent finance people assume they’re getting the very best deal possible and only 18 percent of them haggle.”

    I guess it is like anything else… be very wary of falling into the default behavior.

    Sean’s last blog post..The Drugstore Game – How Do You Calculate The REAL Savings?

  8. I don’t know about everyone else, but everytime I have ever bought a new car we didn’t discuss financing until after the price was already decided on.

  9. 0% financing is not a scam, in fact I have it right now on a car I own, a Hyundai Sonata, with a 5 year loan.
    We got the price of the car where we wanted, and then discussed financing. Make sure you cross check that price with other dealerships, carmax, and other sites online to ensure the price you’re paying is a good one.

    Remember, the dealer HAS to make a profit, otherwise they wont be in business. The key is to get the price to an amount where everyone is happy.

    I’ve seen less 0% financing offers nowadays, but they are real and given to customers with excellent credit. The dealer will also try to get you to buy a bunch of extras after the sale, including things like warranties, paint protection, oil change packages, and rubber strips to protect the edges of your door. Turn them all down, if you wanted to buy these you can usually get them outside of the dealer at a much cheaper cost. I view them mostly as a waste of money though anyways, and always turn those items down.

    Tim’s last blog post..King Of The Bastards.

  10. I work in a car Dealership and I can tell you that the 0 % is true. You do give up any other incentives though. If you are borrowing over 20,000 then it is a savings to take the 0%. If you are borrowing less than that then usually the rebates are the better deal. The dealership does not lose anything. The lenders offer the rates in exchange for the rebates
    I hope that makes sense.

  11. I just walked out of a Hyundai dealership today.

    The guy basically told me straight up that a portion of the profit of the car is paid to the Lending Agency/Bank.

    The key is to calculate how much profit they are making and see how that compares with other deals that include interest. This guy offered to roll in a personal debt of six thousand I have into the car price. He’s aparently telling the bank the car is worth that much, and to compensate he’s throwing in extra options, and I’m assuming getting the bank or lending agency to understand that he took me for the full amount. This is a sort of cash back deal.
    I’m currently trying to figure out if I’m missing something here.

  12. I was just going to say what Etrop said…

    Remember, the car dealer and the finance company are two competely separate businesses. One makes money by selling cars, the other makes money by loaning money.

    1) Car dealer has inventory on its lot. Car dealer’s goal is to push their inventory and get those cars sold as soon as possible to keep them from sitting on the lot. (Two reasons, one obvious, one not so — A) Cars depreciate over time, the longer it sits on the lot, the lower they have to sell it for; B) dealers usually have a floor plan [big loan used to buy their inventory in the first place], so the longer cars sit on their lot, the more interest they pay to their own lenders). Bottom line, car dealer wants to sell cars as quickly as possible. In the current market, cars aren’t selling that well…

    2) Lender has money to loan. If people aren’t buying cars, then lender isn’t giving loans either. Lender and Dealer get together and say “What incentive can we give to get customers in here buying/financing cars?” Enter 0% financing.

    3) Well, at 0%, how does the lender make any money if their loans are basically free? Answer, cutting into the dealer’s profit. Dealer buys down the rate to 0% by selling the contract to the lender at a discount, maybe 10-20%.

    Example: Suppose the dealer is selling a $24K car and wants to offer 0% financing to the customer. Suppose lender’s buydown to 0% is a 15% holdback. That means the car dealer sells that financing contract to lender at a discount, Lender keeps 15% of $24K ($3600), and writes the dealer a check for $20,400. ((Customer owes the lender $24K, but lender only paid $20.4K for the contract)).

    Lender makes money by charging the dealer a $3600 “fee” to buy the rate down to 0%. How does dealer make money? By pushing inventory. True, if it was a cash sale, they would make even more money. BUT the dealer would rather lose $3600 in profit by offering 0%, than for it to sit on their lot and not sell at all, in which case they make no profit.

    You also wonder whether the dealer jacks up the price to compensate for their profit loss? I work for a finance company; we do these 0% arrangements. We loan to value, meaning if the dealer jacked up the price, then the car would be over book, and we would not approve the loan.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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