Most major car dealerships these days offer a variety of financing options for purchasing a new car. Being able to get auto financing is important for most buyers, as purchasing a brand-new car outright is expensive and beyond their means. But the number of financing options can be a little confusing, with so many seeming attractive. There is one that is worth searching out, however. The holy grail of auto financing options- 0% interest.
Not all car dealers offer 0%, but if they do, it’s as close to “free money” as you can get. Obviously, it’s not actually free money. You still have to buy the car at the end of the day. But what you won’t have to do is pay thousands of dollars in interest or drop a huge heap of money in one go. Win, win… Or is it?
Not to spoil the ending of this little story, but yes, 0% financing is the best option if you want to finance your new car purchase. The problem is, not everybody is eligible, and it’s easy getting suckered in with the carrot of 0% dangling in front of your eyes only to feel obliged to take a less attractive offer when you realize that you can’t get it.
What Are the General Criteria for Getting 0% Auto Financing?
This isn’t an easy question to answer because it will depend on the car dealership you are buying from as well as the company that they authorize to sort out financing options. In a typical scenario, you will need a decent credit score of over 700 to qualify. You will also need to have full-time employment and be able to provide proof of residence and other financial documentation.
Can You Get 0% Auto Financing from All Car Dealers?
Some car dealers never offer 0%. Some always “offer” it but rarely authorize it (these are the ones to watch out for). Others will offer 0% auto financing when the economic climate allows them to. Which right now, for many, it doesn’t. The number of 0% financing options out there at the moment is slim, and research suggests that it has halved in the last two years. There are many reasons why this has happened, including rising interest rates and a general downturn in positive vehicle equity.
How Much Can I Save With a 0% Financing Option?
If a 0% financing option is open to you, then you can save some serious dough. Let’s throw some numbers at it. The average interest rate for car finance is 5%. The average cost of a new car is $25,000. The average length of finance is six years. If you purchase a $25,000 car on 5% finance over sixty months, you will pay a whopping $3,300 in interest. On a 0% finance option, you would not pay any of this. It really is a no brainer if you can get it.
But How Can Dealers Afford to Offer 0% Auto Financing?
To understand how dealers can offer 0% financing, you have to understand who is offering it. More often than not, 0% financing offers come directly from the carmakers themselves.
Why do they do this? Well, the answer is simple – to sell more cars. It may be that they are having a slow year, or a specific model of the car they make is struggling for sales.
Offering 0% car financing can incentivize purchases enough to spark interest in consumers and, at the end of the day, increase sales. It can also allow them clear space for a new model by shifting outdated models. This explains why 0% financing options are generally offered more frequently in summer months, just before new car models hit the market.
It’s not only carmakers that drive 0% financing options. Some dealers will also offer their own 0% financing options. This means the dealer is in effect, subsidizing your purchase to force through a sale. You may be asking what’s in it for them? The short answer is they get the sale. It may be that they need to shift some of the last years’ cars or are just looking to increase sales.
Either way, so long as you make all the payments, they still make a healthy profit from the mark-up they receive on the car’s retail price. In most cases where the dealer is offering the 0% finance option, a hefty up-front payment will be required.
Things to Consider When Looking at 0% Auto Financing
Just because a 0% financing option is available, don’t think it is the only way to buy a car or, indeed, that the vehicle offered is the only one to buy. Don’t be swayed into purchasing a particular type of car just because it has 0% financing. Check that the car is the right one for you and is the one you really want.
If you have decided the car is the right one, think about whether you can afford the monthly repayments. Just because the car is 0% doesn’t mean the repayment amounts will be small.
Another thing to consider is whether you can afford it outright. If you can, then that might still be the best option. Who knows what your future finances will be? It might be that by paying everything right now, you will prevent financial hardship down the line. If you can’t pay for the car but do have a chunk to drop as a down payment, that might still be a good idea. The more you pay off at the beginning, the lower the monthly payments will be.
Conclusion
Our final tip is to resist taking the loan out for longer than 60 months. Some car dealers will try to tie you into loans of 72 months or longer. Don’t get suckered in, unless you need to. Extending a loan longer than you need it will only increase the chance you could end up in difficulty making payments. Plus, who keeps a car for six years these days? Think about how long it will be before you want to trade in and match the loan period to that. That way, you won’t have a final large payment or risk lumping debt on debt to get a new car.
Image Credit: Joe Brockmeier.